GW&K Emerging Markets Equities Strategy Commentary – 3Q 2023

Emerging market (EM) equities confronted a slew of challenges in the third quarter. From China’s unrelenting property market troubles to a powerful US dollar, escalating global bond yields, and a sharp 27% hike in oil prices, the waters were certainly rough. Nevertheless, the MSCI EM Index dipped by just -2.9% during the period, slightly beating the MSCI World Index of developed markets (DM) which slid -3.5%. By September’s end, the EM benchmark had climbed a modest 1.8% for the year to date, dwarfed by the 11.1% ascent of its DM counterpart.

The quarter did offer a glimmer of hope: potential stabilization in China’s economic landscape and sustained policy backing. Initial enthusiasm over upcoming aid for the ailing property sector propelled China’s market to an early 10.8% jump in July. Yet, hopes of sweeping, “Western style” economic boosts faded amidst whispers of hesitation from China’s senior leadership. Thankfully, by quarter’s end, a series of positive economic reports hinted at budding stability. Despite this, challenges persisted for major property developers and discouraging currency dynamics stifled inbound investments. The quarter saw the MSCI China Index register a modest -1.9% loss.

While EM Asia mirrored the EM benchmark’s -2.9% fall, it was a mixed bag across the continent. Modest gains in India and Malaysia were overshadowed by significant tech-driven downturns in South Korea and Taiwan. In contrast, the EM Europe, the Middle East, and Africa (EMEA) fell by a modest -1.7%, boosted by robust gains in Turkey, Egypt, and modest gains in oil behemoths like the UAE and Qatar. Yet, it wasn’t all sunshine: heavyweights Saudi Arabia and South Africa both endured roughly -5% losses, with Saudi’s oil production
cuts potentially diluting the boon of rising oil prices.

EM Latin America, after a sterling first half, lagged, dropping -4.7% for the quarter. The culprit? Rising US rates undermining Latin America’s appeal to foreign capital. This reality was reflected in a 3.3% depreciation of MSCI EM Latin American currencies. Brazil, for its part, slashed its central bank policy rate, triggering a 3.6% slide in its currency against the US dollar. Mexico, in a divergent move, maintained its high policy rate, which did prop up its currency, but equities paid the price, dropping -6.5%.

Sector wise, Energy was the quarter’s shining star, benefiting from the oil price surge and OPEC+ production curtailments. It stood tall with an impressive 6.3% gain, contrasting starkly with the Information Technology sector, which dropped by -6.2%. Consumer Discretionary emerged as another rare bright spot, buoyed by China’s potential economic revival. Conversely, other sectors like Utilities, Materials, and Communication Services lagged. Reflecting the strong performance of the Energy sector, EM Value stocks outpaced Growth stocks in the quarter, amplifying a trend from the first half of 2023 and widening the Value’s yearly outperformance to nearly 8%.

Though EM Information Technology has gained 12.3% year to date, that increase looks modest next to the 30.4% surge in DM Information Technology. This gap likely reflects handicaps for China’s tech giants from US restrictions as they race to develop artificial intelligence. It may also show lingering damage from China’s regulatory crackdown on its tech industry in recent years. While the US and allies lead in cutting-edge artificial intelligence now, China remains determined to stay in the race and potentially take the lead down the road. Its tech firms face near-term hurdles but retain formidable long-term potential.

From a valuation perspective, EM equities seem enticing. As of September’s close, the cyclically adjusted price-earnings ratio for EM was 10 times, with China even lower at 8.3 times, juxtaposed against the US market’s much higher 24 times. While this may reflect rational pessimism regarding China’s recent growth challenges and US-China geopolitical risk, EM growth seems likely to surpass DM in the coming year. Add to this a notable drop in EM inflation and potential for rate cuts and other policy support. Against this backdrop, we are cautiously optimistic about prospects for EM outperformance over DM in the upcoming years.


Indexes  are  not  subject  to  fees and  expenses  typically  associated  with  managed  accounts  or investment funds. Investments cannot be made directly in an index. Index data has been obtained from third-party data providers that GW&K believes to be reliable, but GW&K does not guarantee its accuracy, completeness  or timeliness. Third-party data  providers make  no  warranties  or  representations  relating  to  the  accuracy, completeness or timeliness of the data they provide and are not liable for any damages relating to this data. The third-party data may not be further redistributed or used without the relevant third-party’s consent. Sources for index data include: Bloomberg (,  FactSet  (,  ICE  (, FTSE Russell (, MSCI ( and Standard & Poor’s ( Performance results reflect the reinvestment of dividends and income and are expressed in U.S. dollars.  MSCI Index returns are presented net of withholding taxes. This represents the views and opinions of GW&K Investment Management and does not constitute investment advice, nor should it be considered predictive of any future market performance. Opinions expressed are subject to change. Past performance is not indicative of future results.


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