A sustained shock would also complicate fiscal policy, especially in countries with limited buffers. Yet, despite uncertainty over how long energy flows could be affected, EM equities have remained resilient, supported by regional dispersion, the tech rally and earnings growth, which is expected to accelerate well above that of developed markets.

EM equities: strong earnings growth, a robust tech cycle and better positioned for stress

Earnings growth is a key driver of this EM resilience, but divergences persist as EM countries are being affected unevenly. Latin America is relatively insulated given its distance from the conflict and status as a net energy exporter, while Asian energy importers are more exposed. Higher oil, gas, fertiliser and freight costs can slow disinflation, with a tougher inflation/interest-rate trade-off for importers. Fiscal space and the ability to implement subsidies also vary across the region. For example, the fiscal space is greater in Korea, Taiwan and China than in India, Indonesia, the Philippines and Thailand. Overall, EM resilience is confirmed also by the smaller capital outflows, contained borrowing costs and stronger policy frameworks recently highlighted by the IMF. 

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