EM equities – down, but not out

It is tempting to ascribe the recent underperformance of emerging market equities to the waning appetite of overseas investors. There may be some truth in this. However, the evidence from mutual fund flows at least suggests that US investors are still looking for better returns abroad. We think the underperformance of emerging market equities this time around has more to do with the onset of policy tightening in most of the major emerging economies. While this is weighing on local markets for now, we don’t expect the drag to last.