EM assets have typically outperformed their developed market counterparts when commodity prices, especially oil, are strong, and vice versa.
Is this still the case? With Asian economies emerging from coronavirus lockdowns much earlier than the rest, can EM assets now outperform even while real oil prices languish at historical lows?
• EM equities have limited direct or indirect oil content, and EM benchmarks are dominated by countries who are significant oil importers, i.e. beneficiaries of cheap oil.
• EM debt, especially hard currency-denominated debt is dominated by oil. Petro-credits are extremely vulnerable with contagion effects difficult to predict.
• The most liquid EM currency pairs are in oil-importing economies, but the primary driver here is global liquidity, risk appetite and the U.S. dollar.