EM – Unfavourable Macro Backdrop | Harris Fraser
Research Insights
22 December, 2022
EM – Unfavourable Macro Backdrop

As optimism continues to build in global equity markets, sentiment improved on hopes for easing monetary tightening from the Central Banks. EM equities rebounded over the month, and diverging from the previous month, Chinese equities led the way, contributing to the outperformance of EM markets in November. Over the month, the MSCI EM index gained 14.64%.

The latest data suggest that the global inflation situation is showing signs of easing, market expects that this could pave the way for easing in the tightening monetary policy. While we agree that rate hikes could slowdown, we do not see the case for a complete halt, or even a pivot in the trajectory. Although inflation could have peaked, it remains at an elevated level, central banks leaving rates at a restrictive level should be the base case for the coming year. The tighter financing conditions in global investment markets reduces valuation levels, and further amplifies economic hardships.

Apart from headwinds in form of a restrictive monetary landscape, the overall economic backdrop is also unfavourable to EM. Global economic slowdowns effect exports, the weaker balance sheets of EM economies is also less capable of supporting economic compared to DMs. In short, although EM equities have held up reasonably well this year, we do not see good grounds for further upside in EM equities for the coming year given the headwinds. Henceforth, we would remain conservative over EM equities in the short term.


 

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