Emerging Markets: Stirred, But Not Yet Shaken

The conversation centers on the market's reaction to the conflict and rising energy prices, particularly regarding inflation and potential growth shocks. Kamakshya Trivedi, Chief Foreign Exchange and Emerging Markets Strategist at Goldman Sachs, observes that markets are pricing in a higher inflation shock, evidenced by shifts in interest rate expectations. Traditional hedges like long duration, gold, and the Swiss franc have underperformed, creating a challenging environment for portfolios. While equities have generally declined, a clear cyclical growth tilt is absent, suggesting a potential future growth shock if the conflict persists. Despite a stronger dollar supported by the U.S.'s favorable terms of trade, emerging markets, especially those tied to the AI theme like Korea, are expected to rebound post-conflict, driven by strong earnings growth and structural factors such as a weakening dollar and underweight allocations.