Despite broadly underperforming since the start of the Iran war, the asset manager said it still sees pockets of resilience for emerging markets – particularly in hard currency debt.
Speaking in BlackRock’s latest Weekly Market Commentary, the firm’s global chief investment strategist Wei Li said the firm is still seeing bright spots in emerging market equities and bonds.
Despite a shift in fortunes for emerging markets – which have lagged amid a stronger dollar since the onset of the Middle East war, reversing gains from the prior 18 months – she said some areas still appear attractive.
While disruption in the Strait of Hormuz disproportionately hits energy importers such as India and other Asian economies, Li noted that many commodity-exporting countries – particularly in Latin America – have minimal exposure.
“Further driving emerging market differentiation are mega forces, such as where these emerging market countries are in the global AI ecosystem and also in the energy transition.”
Li highlighted emerging market hard currency debt as a current favourite for the asset manager for three key reasons; higher quality income, lower duration and more Latin American exposure.
“Number one: increasingly higher quality income. Hard currency high yielders have been driving a lot of the recent credit upgrades.”
She added that lower duration also makes the asset class more appealing. The main JP Morgan EM hard currency debt index has seen its duration shrink to near its lowest levels in the past two decades, making it less sensitive to interest rate changes.
Third, Li said the index’s tilt toward Latin American commodity and energy exporters increases exposure to sectors poised to benefit in a supply-constrained, “supercharged” global environment.
“Restrictive monetary policy from countries like Mexico and Brazil have allowed them to cut interest rates since the conflict began – a modest but meaningful boost and a stark contrast to market expectations for many DM central banks,” BlackRock stated.
However, the asset manager noted that if the Federal Reserve were to hike and the US dollar strengthens, EM central banks may have to respond in kind.
For equities, Li said BlackRock remains selective in the space.
“We favour renewable energies and AI and automation names in China, but given involution, pricing competition, this is a very active story. I would also note that stretched positions in popular South Korean memory chip names have washed out quite a bit this past month, making it a bit more attractive,” she said.
The high-flying Kospi index has swung sharply since the war began. However, it has rebounded to recent highs following a broad market rally on 8 April after the US and Iran agreed to a two-week conditional ceasefire – though Iran has since said the truce has been breached.
Again highlighting Latin America, Li pointed to critical mineral exporters in Chile and Peru as “well-positioned” from AI demand as well as the energy transition.
The asset manager’s focus on emerging market options follows its decision to cut its equity exposure to neutral across the board in late March.
Emerging hard currency debt is now one of only three asset classes in which BlackRock is overweight, along with Euro area government bonds and US agency mortgage-backed securities.