In response to the announcement of the Iran/US deal, Candriam’s Head of Emerging Markets, Paulo Salazar looks at the impact on EM equities.
The Iran-US ceasefire/de-escalation scenario reinforces a macro backdrop that we have been discussing with investors in the past couple of weeks: lower geopolitical risk, softer oil prices, easing inflation pressures and a weaker USD are a constructive environment for Emerging Markets.
A sustained decline in oil prices should help bring headline inflation lower across many EM economies, giving central banks additional room to ease policy and improve domestic financial conditions.
The weakening USD is particularly supportive for EM assets. Historically, periods of dollar softness have coincided with stronger EM equity and local currency performance, as external financing conditions improve and capital flows broaden beyond the US.
Lower energy prices act as a positive terms-of-trade shock for net oil importers, supporting consumption, current accounts and corporate profitability across several EM regions.
We continue to believe that this environment could trigger a rotation within EM equities. The Energy sector, which outperformed during the recent geopolitical tensions, may give back some relative gains, while Materials could benefit from improved global growth expectations and a normalization in commodity markets.
Precious metals are also worth watching. The sector lagged expectations since the conflict began, despite elevated geopolitical uncertainty. As markets shift focus from war risk toward lower rates, a weaker dollar and improving liquidity conditions, precious metals could begin to catch up.
Regionally, we see particular beneficiaries among net oil-importing markets, including parts of Asia, as well as countries such as South Africa. In Latin America, lower inflation and easier global financial conditions should also be supportive, especially where central banks retain room to continue easing cycles.
Overall, the combination of softer oil prices, declining inflation, easier monetary conditions and a weaker USD represents one of the most constructive macro setups for EM that we have seen in recent quarters, and is broadly consistent with the framework we have been presenting to investors over the past few weeks.
