No Rest for the Weary
The year began with expectations that the majority of problems carried over from 2021 were easing and largely priced in and emerging markets’ growth was poised to accelerate. However, macroeconomic and geopolitical uncertainty roiled global equities. War in Ukraine, higher inflation and hawkish statements from central banks combined to pressure risk assets, and emerging markets underperformed developed markets.
The Russia-Ukraine war drove commodities prices higher, exacerbating inflationary pressures and weighing on many emerging markets currencies. In China, internet companies fell as sustained regulatory pressure dampened sentiment, and a spike in COVID-19 cases and government restrictions pressured corporate earnings and suggested further challenges to the global supply chain.
Hear directly from our investment team on performance, portfolio positioning and the market environment. Read key takeaways from the replay below.
Inflation and Style Rotation
The shift in the narrative around inflation from transitory to more persistent led central banks to raise interest rates to fight inflationary pressure, which drove the violent rotation out of growth into value. Close to 80% of the portfolio’s underperformance this year is attributed to the headwinds from style while stock selection has been positive.
Finding Opportunities in Financials
We added to financials, particularly banks. The sector appears well-placed to benefit from higher margins on the back of rising rates and reserve releases. Loan growth is expected to improve with the improvement in economic growth.
Reduced Underweight in China
We have reduced our underweight in China as we uncover opportunities in areas receiving strong policy support. Examples include companies involved in the green energy value chain and high-end manufacturing. We also continue to expect the Chinese internet sector to perform better on fundamentals as regulatory changes ease and improve sentiment.
The government also is encouraging the resumption of production activities by lifting many logistic restrictions, which should ease supply chain challenges. A number of traffic indices appear to be bottoming and even improving. For instance, foreign trade related to containers is beginning to turn positive.
We expect recent headwinds to be less problematic for emerging markets as we move through 2022. Countries continue to make progress against the coronavirus, which supports economic recovery. China has signaled a shift from a regulatory stance toward policy easing, market stability and growth. Relative valuations are attractive, and emerging markets’ growth premium relative to developed markets further supports our constructive view.
We recognize that there are still many uncertainties and risks. The analysts are working closely with the portfolio managers, reviewing current holdings and identifying new opportunities.
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