Emerging markets and China

Whilst there are many different emerging market regions (Asia, Latin America, Eastern Europe, Middle East), we do typically refer to the region in aggregate as “EM”.

And, at the moment, we are UW the EM region, for a few reasons. One is Omicron, where it isn’t clear that vaccination rates are high enough, or that medical facilities are supplied well enough, to handle the flow of COVID cases that result.

Secondly, the US is tightening monetary policy. As a monetary superpower, those monetary decisions have powerful spillover effects.

Here we see Brazil, Chile, Peru all dramatically hiking interest rates, in response to their own domestic inflation, but also to prevent / forestall the material impacts of weakening currencies, and sizeable capital outflows, that would otherwise occur.

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All of that acts to crunch domestic demand, which we think makes the region a challenging DAA call to go overweight.

Then there’s the run of data out of China. Growth has effectively stalled, and the competing objectives of “stabilise the economy”

…vs wring the froth out of the materially-over-heated property market, are in stark contrast to each other.

Hence, we sit on the side-lines, and watch for a better opportunity.

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