Covid headwinds ease as China risks rise

At the time when EMs are navigating towards a healthier environment (Covid cases numbers shifting downward and vaccination rollouts speeding up), China’s selfinduced deceleration is now looming. 

Those economies that are most exposed to China (i.e., based on trade and commodities) with limited policy room are the ones most at risk. EM debt is still a good source of carry; we do prefer local rates, where CBs are closer to the end of their normalisation cycle. We are cautious but constructive on EM equities, whose valuations are attractive by global standards.

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