War muddies investment case for emerging markets; brace for outsized risks

OVER the past decade, investors in the emerging markets (EMs) have been sorely disappointed by their underperformance. In the 10 years until end-February, the MSCI Emerging Markets Index returned just around 3.2 per cent on an annualised basis, against the MSCI World Index return of 10.7 per cent.

To be sure, part of the drag arose from China, which accounts for over 30 per cent of the index. In the past year alone, investors have had to grapple with a number of challenges in China, including policy pivots arising from "common prosperity", which has decimated the tutoring industry, a regulatory crackdown on technology companies, and debt defaults in the property sector.

Russia's invasion of Ukraine is only the latest spanner in the works for EMs, and the consequences of the war may be far more severe than recent crises such as Covid-19. For one, the war is already lasting longer than initially expected. The fallout to date in terms of heightened risk aversion, markedly elevated oil prices and the expected dent on European growth threatens to further undermine the EMs as an investment case, despite relatively attractive valuations.