For active managers, emerging markets may provide an opportunity to weather recent market volatility and potentially generate alpha, says Todd McClone, a portfolio manager for William Blair’s emerging markets strategies. However, emerging markets are not homogeneous and pinpointing the reason for dispersion is critical to finding opportunities. Over the past decade, the economic performance and resulting earnings growth of emerging markets has disappointed relative to developed markets (particularly the United States), he says. This is because since the global financial crisis (GFC), quantitative easing in developed markets has supported economic growth and equity market valuations, but that policy option has not been readily available in emerging markets. This is starting to end with much of the world tightening monetary policy and emerging markets are coming out of the pandemic stronger with growth starting to pick up naturally. In Brazil, for example, valuations are already attractive in the wake of last year’s substantial derating with the Brazilian central bank aggressively raising interest rates in response to the spike in inflation. Meanwhile, China, which was first out of the pandemic, has already begun the process of easing monetary policy. It’s moving at a slower pace than the market hoped, but the pace of easing should accelerate in the coming months and quarters, supporting economic growth, corporate profit growth, and equity market valuations which are currently at 10-year lows. This dispersion in monetary policy cycles gives investors the opportunity to add exposure to countries where an easing monetary policy should support growth and valuations, and to avoid countries where the opposite is true.
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