Emerging markets

China-centric equities have enjoyed a good bounce, off deep lows (post tech/state champion crackdown, post property sector meltdown) however the overall EM ETF is flat-to-down, given other constituents (e.g India) have traded weakly. Once again the region defies easy positioning.

There are very good reasons to be concerned, about the EM, not the least of which is US monetary policy.

You can stick the below variables into an econometric model to work out what the correlates should be (and we do!) but headlines are tighter monetary policy, a higher USD, and higher VIX are negatives for EM performance.

Commodities are normally a positive, unless they are higher due to a supply shock. A positive demand shock, meaning stronger global growth, usually associated with higher risk appetites, tends to be a strong positive.

A higher level of abstraction is just to plot against FCI variants. Same idea comes through. Tighter financial conditions, weaker EM.

So, the question is, are they cheap enough, and are tighter conditions sufficiently “priced in”, to warrant adding to the allocation or are the feedback loops only just kicking in now, meaning things may get worse, and they can get worse very quickly, as Sri Lanka has shown.

“Don’t know”, is our answer.

Diversification is important, US equities are not without their own uncertainties.

If the US is not without uncertainty, you can guarantee European equities are likewise not without some significant concerns, and hence spreading the capital far and wide seems prudent.

That, in addition to classical asset class defensives like cash, bonds, and alternatives, likely means having some varied geographical exposure, within equities, and that includes the EM region.

Lastly, there is always the headline valuation of “10x forward PE when that’s where all the population growth is”, which looks pretty good.

NB, for those who do care about the factor loadings, they look like this.

Monetary policy shows up through FX, delta in rates is correlated to higher expected growth, commodities index likely related, VIX is risk. Right signs, right magnitudes etc.

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