Emerging market assets (EM) have recovered from their 2018 slump, thanks to a favourable combination of lower expectations for US interest rates, growth stimulus in China, and a ceasefire in the trade war.

 

Emerging markets with the strongest fundamentals rallied first, but now even the economies with lingering weaknesses are enjoying a recovery, in part thanks to strong inflows into dedicated EM funds since the start of 2019.

 

While we think that the EM rally is justified, a degree of complacency and overextended positioning may be sowing the seeds for another correction. I believe this risk calls for active differentiation between EM investment opportunities, in particular looking for selective hedges (in the weaker economies) against another broader EM market downturn.