Barring any harsh lockdowns from the emergence of new coronavirus variants and related disruptions, we remain optimistic for our outlook on EM equities, but it is not without risk.
We have concerns over the valuations in some parts of the market, namely mega-tech companies (a major part of the index). Large retail investor involvement, multiple expansion, and crowded initial public offering subscriptions are signs of some “irrational exuberance” and a potential asset bubble.
Tech companies’ innovations have fundamentally shifted how we communicate, engage, and transact, but like other industries that have grown rapidly (and become systemically important), EM tech companies—specifically those of Chinese origin—have increasingly found themselves in the crosshairs of regulatory authorities.
Additionally, while a more antiquated part of the market, the direction and volatility of energy prices pose a key risk to some EM economies. Stable price and production levels are critical to the success of the regions’ export and import activity. Oil has a major impact on many EMs, both on an import basis for countries like China, India, and South Korea and also export nations like Brazil, Russia, and Saudi Arabia.