Emerging market equities: balancing the promise of innovation with the risk of inflation

Daniel J. Graña, CFA

Portfolio Manager

1 Dec 2021

While innovative companies provide a favorable longer-term backdrop for emerging market equities, Portfolio Manager Daniel Graña believes that nearer-term prospects will be influenced by the trajectory of inflation, and policy makers’ response.

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Emerging markets in 2022 are going to be largely driven by two key themes. One is, is the inflation that we are seeing in the United States transitory. If it is not, then perhaps the Fed is behind and interest rates need to go higher. And that, of course, typically is a more difficult environment for emerging market equities to perform. And the second question is, can China manage a soft landing? As they are reengineering their economy and doing a significant amount of policy change that is affecting many different industries, can they successfully stick the landing?

We are most excited about, in 2022, innovation. And innovation broadly written, whether it is decarbonization, the entire decarbonization chain of solar, wind and all the sort of bits and pieces that go into it, as well as new innovative companies such as biopharma companies, the sort of early-stage pre-revenue even, that show promising results in drug tests, clinical tests. And so we want to focus on innovative companies in 2022.

In my view, the most underappreciated risk in 2022 will be policy error. Policy error in economic policy-making and policy error in geopolitics. More specifically, between U.S. and Chinese officials.

Historically, there were two reasons for investing in emerging markets. The convergence story and the outsourcing story. But increasingly there is now a third reason to invest in emerging markets, which is innovation. The most important takeaway in 2022 is that that third pillar – innovation – is real. That we are no more, we are, as an asset class, more than just outsourcing and convergence, that we actually will have a fair number of companies that are innovating and solving local challenges. So that is what gets me excited.