1. As the impact of sanctions start to weigh on Russia, contagion is being felt across global markets. One immediate outcome has been a spike in energy and commodity prices on interrupted supplies from Russia and Ukraine. Although global inflation was already elevated amid supply-side shortages, shipping disruptions and increasing commodity prices, we are seeing an acceleration following Russia’s invasion of Ukraine. Although we believe inflation rates could moderate in the year ahead, risks— including the duration of the Russia-Ukraine conflict and how quickly oil and commodities supplies normalise—could make it difficult to rein in.

2. Developed market (DM) central banks, including the US Federal Reserve (Fed), raised interest rates in March, raising concerns for emerging market (EM) investors. However, we do not believe that rising US interest rates imply weaker EM equity markets. Of the five prior US rate-hiking cycles, the performance of EM equities has been positive, with an average gain of 8% in the 12 months post the first Fed rate hike. The historical evidence shows that EM equities performed better in the 12 months prior to the first US rate hike than in the 12 months after. Nevertheless, gains in the latter period remained positive.

3. Latin American equities have had a strong start in 2022, with the MSCI Latin America Index up 27.3% in US-dollar terms in the first quarter, outperforming both the MSCI Emerging Markets Index (-6.9%) and the MSCI World Index (-5.0%). We believe that Latin American markets remain relatively more insulated from the heightened geopolitical risk in Europe. The ongoing Russia-Ukraine war and subsequently imposed sanctions on Russia have led to higher prices for energy and other commodities, which should continue to benefit the resource-rich region. A search for alternative commodity producers, as countries look to diversify their base, could also boost demand for Latin American suppliers. Corporate earnings momentum has been improving with financial leverage at a multi-year low, while equity valuations remain favourable, in our view.

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