Interview, Fireside Chat, Webinar
Emerging Markets: Stirred, But Not Yet Shaken
- Markets are currently pricing in a higher inflation shock driven by energy price spikes from the conflict, with expectations for rate cuts removed or replaced by hikes in the UK and US, while a clear cyclical growth shock has not yet been fully priced in.
- Hedges involving long duration, long gold positions, and the Swiss franc have broadly failed to protect portfolios against recent developments, and asset allocators remain underweight emerging market assets with global equity allocations at roughly 10% against a 12% benchmark.
- If the conflict sustains longer than the few weeks currently priced by commodity markets, physical shortages are expected to emerge quickly, causing primary growth damage and challenging current estimates for markets such as Korea.
- For emerging market equities broadly, a 10% to 12% upside from current levels is anticipated, driven almost entirely by strong earnings growth in the AI and semiconductor supply chain sectors, with no global recession expected at this stage.
- Once the conflict de-escalates, the valuation premium in the US dollar is expected to erode, creating a tailwind for emerging markets where commodity exporters like South Africa and Brazil are projected to outperform, supported by a trend toward diversification from neutral positioning levels.
- Emerging market assets are expected to display greater resilience than historical memory suggests due to their reliable nature, although if the conflict extends beyond months, the fundamental narrative for these markets could be revised.