Market Insights

Following steep declines in equity markets overall during 2022, emerging markets began their recovery during the fourth quarter. Russia’s invasion of Ukraine, a strong US dollar, tighter financial conditions to combat higher inflation, continued supply chain bottlenecks and China’s zero-COVID policy were significant hurdles to overcome during the year. Emerging market equities posted strong returns for the 4th quarter, helped by a weaker US dollar. We believe the 4th quarter represents an inflection point for emerging market equities to outperform developed market equities during 2023. The combination of stronger economic growth in EM economies, led by a China re-opening, expectations for USD weakness and EM central banks’ ability to lower rates sooner than their developed market counterparts will contribute to the resurgence in emerging market returns and flows to the asset class. Coupled with low valuations for EM equities and light investor positioning, we think there is potential for strong performance during 2023 and beyond.

Dauntless Management would like to extend our warm wishes for a happy holiday season and New Year. In the spirit of 'the Twelve Days of Christmas', we have outlined 'the Twelve Themes of EM' for the year ahead.

The roller coaster ride for global equity markets continued during the 3rd quarter with all major indices losing ground. The question of whether we were in a new secular bull market or simply experiencing a bear market rally – we believed the latter - was answered. Emerging markets were the laggard with currency depreciation versus the USD and weakness in Chinese equities as the primary drivers. Indonesia, India, Chile and Brazil were able to post positive returns in USD, whereas all major developed country indices delivered negative results. Our 3Q2022 Review and Outlook highlights the importance of combining top-down macro analysis with bottom-up fundamental stock selection when investing in emerging markets.

The second quarter witnessed a continued downturn in global equity market returns fueled by global inflation, broad-based interest rate increases, and continued concerns regarding the war in Ukraine, Covid outbreaks and global supply chain issues. Heightened global risks, combined with a strengthening USD that has appreciated more than 11% in 2022, would not typically be a strong backdrop for emerging market equity returns. Interestingly, EM equities have outpaced most developed markets and outperformed US equities by more than 400bps during the quarter. Our 2Q review and outlook provides insight into our views on why we believe this outperformance will continue during the second half of 2022.

There was no place to hide in global equity markets during the first quarter. All equity markets retreated across regions and investment styles, with Emerging Markets amongst the hardest hit. Two fundamental reasons for the broad sell-off were the war in Ukraine and the continued rise in US inflation. Our 1st quarter 2022 Market Review and Outlook highlights why we believe the continuation of the war and the Fed’s move to normalize monetary policy will be near-term headwinds for global growth and equity market performance.

Emerging Market equity returns disappointed investors during 2021, largely on the back of persistent macro headwinds from MSCI EM’s largest constituent, China. Our 2021 Review and Market Outlook highlights some of the divergent drivers of returns in 2021 as well as our views on many of the key factors at play this year in emerging economies, including inflation, GDP growth, Fed tapering and, of course, Covid-19.