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Beware rules of thumb

Market Commentary

07 November 2014

Investors of all types tend to act in accordance with rules of thumb. There are many, but one of the most deeply entrenched is that outbreaks of global uncertainty are bad for Emerging Markets (EM). As a result, investors almost invariably reduce their exposures to EM during risk-off events, usually increasing their allocations to US Dollars and US treasuries. But is this response rational? More importantly, is it profitable? We examined the returns across all EM fixed income asset classes in the aftermath of VIX spikes and found the opposite has been true. Significant excess returns can be gained by reversing this particular rule of thumb and going against the herd.

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