Liquidity conditions have deteriorated meaningfully for EM equities. The left chart below shows that the steep drop in G7 Excess Liquidity points to a risk of much lower EM equity prices in about 3-4 months’ time.
This materially worse backdrop for EM equities is happening just when investors are piling into EM assets. If we look at the chart on the right, we can see that EM bonds and equities are seeing the largest ETF inflows over the last three months. Although, we are selectively positive on some specific EM markets (such as Malaysia), overall we believe investors should rotate away from broad EM equities exposure. (Click on image to enlarge.)