Overall emerging markets have performed reasonably well in the New Year, as markets shifted back to risk-on mode. Major EM equity markets apart from India posted gains, as expectations of a global recession have somewhat reduced. Over the month of January, the MSCI EM index gained 7.85%.

The global macro backdrop has improved over the month, economic fundamentals remain steady, while global inflation eased; the weakness of the US Dollar also provided further support to EM equity performance in the short term. That said, our view on EM equities has not materially shifted from our previous view, the many headwinds that would hinder the medium term outlook remained largely unchanged: Inflation remains high despite marginally easing; EM currencies have rebounded, but still faces the prospects of the Dollar rebounding upon monetary expectations shifts; external demand is also poised to further weaken as global economy slows down.

Hence, ex-China EM equities are expected to remain under more pressure overall. High inflation leads to a weaker consumption for internal markets, while EM governments are unable to answer with fiscal stimulative policies due to inflationary risks. Monetary policies will likely remain restrictive, hindering local economic growth. External market demand will likely remain weaker, until the global economy recovers. The China re-opening should boost demand and trade for neighbouring Asian economies. Hence, considering various factors, with the limited upside in the economy, EM equities are not exactly attractive at the current price point, we would opt to stay conservative in the short term, and only consider Asian EM if opportunity arises.