Can EM equities continue to outperform?

In contrast to equities in developed markets, those in emerging markets (EMs) have rallied since Friday’s disappointing US Employment Report caused investors to scale back their expectations for Fed tightening. We continue to expect the federal funds target rate to be raised further than is generally anticipated by the end of next year. But while that alone would be bad for EM equities, they could still receive some support from low valuations, rising commodity prices and improving global conditions – all of which would probably be required for the Fed to tighten by so much.