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Q3 EM Equity Outlook: Navigating Inflation, Focusing on Sustainability

Jin Zhang, co-portfolio manager of the Virtus Vontobel Emerging Markets Opportunities Fund, addresses inflationary pressures and helps investors navigate Chinese and Latin American markets.

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Key takeaways from this discussion:

  • Over the past 12 months, emerging market equities have produced solid returns, initially boosted by low interest rates, then by the economic recovery, and more recently by rising commodity prices. Q2 returns were driven by cyclical sectors, including energy, industrials, materials, and value financials.
  • Inflationary concerns and tightening monetary conditions are impacting global financial markets. In the short term, investors are rewarding more commodity types of businesses that benefit from higher prices or interest rates. However longer term, product differentiation and strong brand recognition are necessary to pass cost pressures on to consumers.
  • Although Latin America continues to struggle with COVID-19, stocks have recovered somewhat in the region. However, Brazil has incurred more government debt vs. most Asian economies, which changes the country’s fight against COVID-19 from a short-term problem into a long-term one. Investors need to be selective about the businesses they are exposed to here by focusing on well-entrenched franchises.
  • China is a growing pool of potential investments that has shifted from state-run businesses to those run privately by entrepreneurs. While the pool is large, many businesses have shorter-term track records. Being highly selective and imploring ESG parameters as well as understanding businesses relationship with the government is key to finding long-term sustainable investments.
  • China’s political backdrop is an important consideration and could face a coalition of international pressure in the future. It is important to focus on domestic businesses with strong fundamentals and understand changing supply chains.
  • Risks have increased in certain areas of the emerging markets and investors should be prepared for continued short-term volatility. Investors can find long-term growth opportunities and mitigate volatility by seeking quality businesses that benefit from structural growth drivers.

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The commentary is the opinion of Vontobel Asset Management. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice or an offer of securities.

Past performance is not an indication of future results.


Equity Securities: The market price of equity securities may be adversely affected by financial market, industry, or issuer-specific events. Focus on a particular style or on small or medium-sized companies may enhance that risk. Geographic Concentration: A portfolio that focuses its investments in a particular geographic location will be highly sensitive to financial, economic, political, and other events negatively affecting that location. Foreign & Emerging Markets: Investing in foreign securities, especially in emerging markets, subjects the portfolio to additional risks such as increased volatility, currency fluctuations, less liquidity, and political, regulatory, economic, and market risk. Market Volatility: Local, regional or global events such as war, acts of terrorism, the spread of infectious illness or other public health issues, recessions, or other events could have a significant impact on the portfolio and its investments, including hampering the ability of the portfolio manager(s) to invest the portfolio’s assets as intended.

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