staying risk adverse puts a cap on EM valuations. The MSCI EM index was down by a whopping 11.90% over the month of September.

In the month, we observed no change to the macro backdrop. As global inflation stays elevated, central bank monetary policy tightening remains in place, further amplifying the economic slowdown. To add on, the Dollar remains in a very strong form due to its status as a safe haven and the interest rate differential, EM foreign reserves contract, local currencies weaken, EM equity outlook will likely be less positive. The high volatility in global markets and the anticipation of a global recession resulted in markets turning risk adverse, safety seeking puts a cap on the upside potential in EM.

Across the global EM spectrum, we see certain markets with elevated risks. The Indian equity market is one of them, given the downward revision in the economic growth forecast, but inflation remains stubbornly high, driven by food as well as shelter prices. The Reserve Bank of India have responded with more hikes since the start of the year, but valuations remain on the expensive end, exposing the market to more downside risk if rerating takes place in the future. Overall, EM equities should continue to face more headwinds, we would suggest investors to stay conservative and underweight EM equities.