EM – Expect Relative Underperformance | Harris Fraser
Research Insights - Cloned
19 August, 2022
EM – Expect Relative Underperformance

EM equities had a mixed month amidst divergences in market performances. Markets are optimistic that monetary tightening could have peaked, and recession could be avoided. However, due to the poor performances of the Chinese market, the MSCI emerging markets index was still slightly down by 0.69% over the month of July. Major commodities prices have retreated, markets were hopeful that global monetary policy tightening could ease. That said, as PMI breakdowns have shown that inflationary pressures arising from wages and input costs remain significantly higher than pre-pandemic levels, more time is needed before the inflation problem eases. In addition, although food prices have somewhat moderated from earlier highs with the latest, they remain very elevated on a historic level. Considering the heavier weighting of food prices in the inflation basket for EM economies, fundamentals should remain under more pressure when compared to developed markets. Furthermore, expect the US dollar to retain its strength due to the interest rate differential. A strong dollar has been negative for EM equities, as capital outflows from EM hurts valuations, the shift to risk adverse sentiment due to concerns over possible recession also affects the outlook for EM equities. As fundamentals and money flow continue to pressure EM, and the lack of fiscal and monetary stimulus provides no catalysts to the market, we would maintain our view of underweighting EM equities in the short to medium term.

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