Turnaround due in EM equities

Emerging markets (EM) have historically reacted with deep declines to high inflation and interest rate hikes. Although EM equities are in one of the longest-running bear markets, there is a sustainable turning point for the asset class, according to Barings.

The investment management firm says that the withdrawal of stimulus hit corporate earnings, while the outflows from China markets hit EM equities. Other factors include the war in Ukraine and the rally of the US dollar.

“Given the challenges outlined above, it is easy to understand why EM equities remain out of favor. However, as longterm investors, it is also important to recognize that these headwinds are now well-known and already reflected in earnings expectations and valuations of EM equities,” write Michael Levy and William Palmer, Co-heads for Emerging Equities at Barings.

Barings believes some of the headwinds facing EM equities have now begun to fade, with policy changes in China and interest rates likely peaking in Brazil. Barings says that in China, which has a large weightage among EM indexes, regulatory review and implementation seem to be largely complete and the audit issue with the US is being resolved.

“In the near term, global inflationary pressures and monetary tightening concerns are likely to keep volatility elevated across equity markets, until investors have an inflection point in sight, which could potentially coincide with a peak in U.S. dollar strength,” says Barings.