Market sentiment soured, emerging markets were also hit hard in the risk off environment, as capital flows back to safe haven assets. Although Chinese markets gained over the month of June, the MSCI emerging markets index still posted a 7.15% loss.

Global inflation remains severe, and there is no sign of abating. We do not expect the issue of high inflation to be resolved in the short term, and could further worsen. Monetary tightening in EM will continue in response before authorities see a clear resolution to the inflation problems, and the rapid pace of the hikes will likely induce business hardships and worsening fiscal conditions. The shrinking liquidity also limits asset valuations, putting more pressure onto the equity market.

In the face of both a deteriorating marketing condition, and well as the risks of recession, market is shifting towards a risk off sentiment, which would likely increase fund outflows from EM equities. Moreover, prices surges on fuel and food will have a disproportionate impact on EM economies due to their larger share of the consumer’s basket. As the monetary policy is already tightened in response to inflation, EM economies do not have much visible upside potential in the short to medium term, we keep our view of underweighting EM equities unchanged barring China.