Emerging Markets – Headwinds Ahead | Harris Fraser
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23 April, 2021
Emerging Markets – Headwinds Ahead

Emerging Markets saw continued volatility over the month. Chinese markets in particular retreated more despite solid fundamentals, while other EM indexes varied as the economic outlooks and epidemic situations were mixed. Over the month, the MSCI Emerging Market Index lost 1.70%.

At the start of the year, we were positive on EM equities as we expected the Dollar to go weaker, given that there were 1) low interest rates; 2) continued quantitative easing; and 3) a widening fiscal deficit. However, the Dollar had a recent bull run, mainly on the back of rising rates fuelled by inflation fears. In the mid to long-term, fundamental factors for a weak Dollar never left, commodities prices are also on the rise, both which should provide further support to the EM. However, we have to acknowledge that the constant dread of the Dollar strengthening poses as a material risk to EM equities.

We also note 3 other factors in play which could potentially act as headwinds against EM equities in the mid to long-term: 1) vaccination progress; 2) inflation risk; and 3) potential fiscal cliff. Vaccinations in the EM space is currently lagging, threat of inflation could mark an end to the easy monetary policy, and mounting external debt could result in fiscal cliffs in the near future. These together create a lot of uncertainties for the EM, which would dissuade us from overweighting the market in the short term. Henceforth, we would prefer overweighting DM instead of EM in this time frame.
 

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