The top approach to emerging market equities

The standard approach to EM equity is to focus on bottom-up company analysis and stock selection and top-down factors are a secondary consideration at best. The dominance of this view creates opportunity, as we feel that the bottom-up consensus alternatively ignores, and then overreacts to, top-down drivers. A particularly powerful recent example of this was the ‘taper tantrum’ in May 2013. We believe that many drivers of emerging market stocks sit at the country level: economic growth, fiscal and monetary policy, interest rates, currencies and political and institutional risk are all national effects. In the last three years, the Taiwan dollar has depreciated by 7.8% against the US dollar, and the Taiwanese central bank has cut its policy rate by a total of 38bp. In the same period, the Brazilian real has depreciated by 43.7% against the US dollar, and the Brazilian central bank has hiked its policy rate by a total of 700bp. Care to guess which market has performed better? (VIEW LINK)