Page 15 - ISQ UK_October 2021
P. 15


           WHAT TO KEEP AN EYE ON                               IN CONCLUSION

           CHINA                                                We continue to believe that emerging markets will remain a
           While China emerged quickly from the pandemic, lingering virus   powerful driver of global growth and the recent narrowing in
           outbreaks and ongoing supply chain issues have taken a toll on its   its growth premium should be short-lived. The longer-term
           domestic economy. The slowdown is coming at a time when Bei-  benefits of investing in economies with superior growth pros-
           jing’s broadening regulatory crackdowns have also undermined   pects and supportive demographic and consumer trends
           investor confidence in the market, leading to underperformance   should lift valuations relative to its developed market peers.
           of Chinese equities over the last six months. It has also weighed on   While the coming months may bring some additional turbu-
           the performance of emerging market equities given China’s heavy   lence, emerging market equities remain cheap. As always, it
           weight in the index. While it is impossible to know how long Chi-  pays to be selective when investing in emerging markets as
           na’s regulatory reforms will continue to weigh on Chinese stock   the asset class is not a homogeneous group.
           prices, the weakness does not seem to be spilling over into the
           wider emerging market universe. One of our favoured indicators
           for flagging risk aversion in emerging markets is the JP Morgan   KEY TAKEAWAYS:
           Emerging Market Bond Index spread, which has been remarkably   •  Global growth continues to shift away from advanced
           stable through China’s recent rout.                         nations toward emerging markets.
                                                                     •  Emerging market equities are nearing their cheapest
           FED TAPERING                                                levels in over 20 years.
           Emerging markets are extremely vulnerable to changes in Federal
           Reserve (Fed) policy. History has shown that Fed tightening, or   •  The rising middle class should support increasing
           even the expectation of future rate increases, can often trigger   consumption and underpin growth trends for years
           instability and capital flight away from emerging markets. With   to come.
           the Fed inching toward tapering its asset purchases, emerging
           markets have been bracing for what could come next. The last
           time the Fed signalled tapering was on the horizon in 2013,
           10-year Treasury yields climbed nearly 1.25% over a four-month
           period, which caused a 10% decline in emerging market equities.
           We do not expect a repeat of the 2013 episode, as the Fed has
           been carefully preparing the markets so there will not be any
           surprises that would lead to an unwanted tightening in financial

           US DOLLAR
           There is a strong inverse relationship between the performance
           of emerging market equities and the US dollar. This means that
           when the dollar is appreciating relative to foreign currencies,
           emerging market equities tend to underperform the S&P 500
           Index, and vice versa. Emerging markets have remained weak
           as the Fed’s Broad Trade Weighted Index has been in a structural
           uptrend since late 2011. While our longer-term view suggests the
           dollar is overvalued and should weaken relative to its foreign
           trading partners, pandemic-related uncertainties and the dollar’s
           role as a safe-haven currency have kept its value elevated on a
           relative basis.

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