One of the dominant drivers of EM equity this year has been what’s happening with the US Dollar, and with US rates. The US Dollar remains the world’s true risk-free rate. And when the tightens interest the way that it has, that’s going to have big implications for the whole of the rest of the world, including the emerging world.
We’ve, nevertheless, found some markets that have been winners despite that. One of the characteristics of both Brazil and Mexico has been that their Central Banks remain extremely orthodox when it comes to inflation targeting. The Brazilian Central Bank hiked rates from 2% to 13.75%, and we’re now seeing what looks like steadily declining inflation in Brazil. Brazil is, potentially, going to be the first economy in the world to be cutting interest rates in 2023.
Year-to-date, the Brazilian Real has been one of the world’s best-performing currencies, even against the US Dollar. And so, there are markets that have been able to do well.
There’s also a US Dollar linked block. The GCC, markets like the United Arab Emirates, they’re pegged to the US Dollar. And whilst that means they do import US monetary policy, you don’t have that same currency risk that we’ve seen come through in other markets.
And then, lastly, some of the Asian markets have been able to intervene in their currencies in order to support their currencies and offset some of the effects of the stronger dollar. We particularly highlight India and Indonesia as markets that have done that, have correspondingly done well, and where we’ve been overweight in the portfolio.