Emerging markets equity: Never waste a crisis

IN 2018 the world economy - and global relations - entered unfamiliar territory, with rising geopolitical and policy risks. We are witnessing the global supply chains and trading relationships that have been integral to growing global prosperity come under increasing pressure. Thus far, emerging markets (EMs) appear to have borne the brunt of the fallout: an asymmetric - and, in our view, excessive - market reaction that has contributed to valuations at near crisis levels by November 2018. However, these are valuations that to us represent increasingly attractive buying opportunities, given where fundamentals stand.

What are markets anticipating?

There has been a substantial divergence in performance between EM and US equities during 2018, on a scale that we find challenging to justify. While the United States has benefited from the one-off, near-term impact of tax cuts and repatriation of overseas profits, this impact is expected to sharply fade in the coming two years, which is forecast to result in widening EM outperformance in terms of economic and earnings growth.