What does this mean for EM investing?
The pandemic is a global crisis, and developed nations have begun to understand that they need to help other countries tackle the virus. Vaccines are being sent to those countries that have had supply issues and this can give us hope that cases around the world should start to decline and the risks of new variants should lessen. Although this is great news socially, financially there remain many reasons why investors should tread carefully in emerging markets. Not least are rising bond yields, which are generally seen as bad for EM economies. Whilst this puts additional pressure on emerging markets, it does not mean investors should shun this market completely, but they should be more selective. India and Brazil will bear long-term scars from this crisis and China’s stellar performance is likely behind us, but in all these nations, there will be individual companies that are better placed to survive the challenges, and indeed to prosper as EM does finally emerge from the pandemic.
In our asset allocation, we have been cognisant of the extremely challenging conditions for emerging markets, and we reduced our overall EM equity weighting earlier this year. However, this was not a complete exit of EM, and we still believe there are many positive investments to be made in the right companies. Fundamental research and active allocation can identify these bright spots, versus a passive approach, which could lead investors into struggling sectors and miss out on the best opportunities.