Although global economy turns out to be more resilient, global risk capital turned more risk adverse due to the uncertainty from the global banking volatility. The US dollar however also weakened due to the uncertainty, which lifted EM equity performance in US$ terms. Over the month of March, the MSCI EM index posted a 2.73% gain.
Global economic slowdown continued, but avoiding recession appears to be a possibility. Without the complete threat from recession, non-export reliant EM economies could have performed better, but the stronger economy and demand would also allow monetary policy to go tighter. On the bright side of things, EM economies are remaining robust, and inflation has somewhat plateaued. A number of EM central banks including India and Brazil have stopped hiking rates, the pause in monetary tightening could help limit the pressure onto the physical economy and investment markets.
From a fundamental side however, macro headwinds that we have noted since months ago has not materially changed. The global economy is still poised to slowdown, which will hamper most EM economies. Large fiscal stimulus are not possible for most EM governments due to the higher debt servicing costs and risks of reigniting inflation. Risk adverse sentiment due to the banking crisis results in more capital outflows from EM to safe havens, also inevitably putting pressure onto EM equity upside. We remain conservative on EM equities in the short term, and will only consider allocation to insulated EM Asian markets when there is some correction.