The recent tech-driven rally in US equities has been characterized by narrow breadth and has pushed valuations. With further Fed and ECB rate rises likely, and some economic indicators flashing red, we remain cautious on developed market equities. We have year-to-date adopted a more barbell approach to DM equities – defensive, high-quality companies at one side and high-growth value creation companies on the other side.

In EM we are more constructive and consider it a good time to build long term positions. With China and DM set to slow in the second half of 2023, EM in general will also slow somewhat, but excess savings will likely continue to buffer domestic demand from the lagged impact of the large monetary tightening over 2021-2022.

Thus, EM growth could surprise on the upside in the second half of 2023. Headline disinflation has set in and should gather pace in the coming months. If the Fed goes on a prolonged pause after July, EM easing (LatAm and EMEA) is expected to start in the coming quarter, but is unlikely to be very deep. The timing of an eventual US (or global) recession is still uncertain but in the scenario of a modest US recession, EM growth should do reasonably well. In addition, the EM story is no longer catch-up growth and productivity gains – EM’s macro fundamentals are transformed and we are taking exposure to companies within EM that have an inbuilt edge and are set to become regional or global leaders.