Ashmore’s Dehn: ‘Extremely fragile’ developed nations can take no shocks

Emerging markets’ lack of monetary machinations make them more resilient than developed markets, Ashmore’s Jan Dehn argues.

Safe haven countries are supported only by the inflationary effects of QE on asset prices, he says.

The cost of borrowing for emerging nations soared on average 200 basis points over the past year, while capital outflows hit the highest level for the bloc since the Lehman Brothers crisis.

Despite that developing nations grew 4.7 per cent over that time, Dehn says.

“If developed economies had experienced a similar tightening of their financial conditions it would have been extremely damaging, bordering on catastrophic, in our view,” he notes.

“Therein lies the most salutary lesson of the past year,” he continues.

At the first mention of weaning the US from QE in May 2013, financial markets reacted savagely, hitting emerging markets with much higher interest rates and sending the treasury yields 100bps up for a time as well.

However, a year on the emerging markets have posted growth 10bps above its long-term growth rate. 

The tapering tremor was “tragically familiar”, Dehn says, in that investors saw uncertainty and, rather than evaluating its implications, simply piled into developed assets.

“Rather than try to work out how tapering might actually impact – or not impact as it happens – EM fundamentals, many investors instead simply reverted to the simple rule of thumb of buying something in America and selling something in EM,” he explains.

“Banks, sensing the opportunity to cross some bonds, started to flog all kinds of misleading arguments about EM’s alleged fragility, while the media leapt on the opportunity to sell more papers.”

A “sober” view shows developed markets have come off second best over the year, he claims.

The US is tracking to post another disappointing annual growth figure of about 2 per cent. Europe is fencing with deflation and the ECB is seriously considering stimulus. Its bounce back from recession has been shallow, at less than 1 per cent GDP improvement in real terms, Dehn says.

“And Japan slumped to negative 6.8 per cent quarter-on-quarter annualised growth in Q2 due to a single tax hike,” he adds.

“Developed economies are in no shape to handle any serious monetary shock in our view,” he continues. 

“The policy responses across the heavily indebted developed economies have been to lift asset prices, but precious little has been done to reform the underlying economies and dealing with serious underlying imbalances and debt problems. Underneath the thin veneer of asset price inflation, developed economies remain extremely fragile.”