Why has EM been so resilient in the face of the Brazil political scandal and this morning’s China downgrade from Moody’s? 

Ultimately investors should own EM equities for the following reasons:

  • Higher EPS momentum and macro growth
  • The Dollar has peaked
  • Commodities, especially oil prices have been stable and are generally moving higher after a 5 year selloff and basing period
  • Fund flows are supportive:  EM equities have been an underweight for >6yrs for the cross over investor

The China downgrade is a yawn for us (really, this is the time you downgrade when growth is stable and policy is working to damp down credit?) and we are more focused on key technical levels on the spread between EM equities and DM equities in the form of the EEM/SPY ratio.

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