Equity strategy in a stuttering post-Covid recovery

Amid so much uncertainty on the biggest macro factors affecting emerging markets (EM) – the pandemic, US rates and inflation, the balance of local and foreign as well passive and active flows – we recommend, in large EM, a tilt from exposure to Technology's secular growth (China, Korea, Taiwan) to the stuttering post-Covid recovery in Commodities (Brazil, Russia, Saudi) and Tourism (Thailand).

Small EM-FM is generally cheaper (apart from the Technology sector, where scarce listings attract a premium) than large EM and locals, driven by low interest rates, are the catalyst for a re-rating. In contrast, foreigners are too restricted by mainstream benchmark indices or too small, if they are the heroic survivors in the dedicated small EM-FM asset class, to drive their markets as they once did on their own. This does not stop them benefiting from better performance driven by locals.

For those able to think long term – through Covid-19 disruption, on the one hand, and through the liquidity demands of periodic redemptions along the way, on the other – we stick to many of the long-term factors we have discussed before to determine our top picks, such as secular Tech growth (cheaper in EM than DM), macro growth (Vietnam, Bangladesh), reform (Indonesia, Pakistan), resilience (Qatar) and a mix of all of these factors (India).

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