The chart compares the returns on the MSCI EM index to those of a long exposure to five-year EM CDX over the last three periods of rising US 10-year yields. EM equities tend to perform better in such an environment as they can benefit from the repricing of the growth premium embedded in bond yields.
We believe that EM equities provide an attractive risk/reward opportunity, as they had been flat year-to-date up until late May and stand to benefit from improved global demand and a fall in risk aversion. If the growth gap between the regions is closed by a pickup in emerging world growth, EM equities will be the greatest beneficiary.
Conversely, EM credit spreads are at risk in our view: with five-year spreads near their three-year lows, there is little room for prices to rise and the carry offered is minor. Indeed, our cross-asset valuation metric ranks EM credit spreads as the most expensive asset in our investment universe.
Source: Unigestion, Bloomberg, as of 2 June 2021
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