We see this year’s EM selloff more as a series of idiosyncratic accidents masking stronger EM fundamentals rather than a canary in the coalmine for global markets. EM economies are holding up, and recessions in trouble spots like Turkey and Argentina should have limited impact. Our research shows developed markets are the key drivers of the global expansion and EMs’ fortunes, with China the linchpin for transmitting growth to EM broadly. Our BlackRock Growth GPS points to steady economic activity in China. EM fundamentals are generally robust, and economic strength is starting to translate into sustained strong EM earnings growth for the first time in a decade. We may also be near a peak in country-specific risks. With much of the steam let out of valuations, a robust growth backdrop, and potential for the Fed to start to slow its balance sheet wind-down next year, we see room for a further rebound. Risks include escalating trade frictions, hefty portfolio outflows, and a hawkish Fed pushing up global rates and the U.S. dollar.

EM assets overall appear to offer attractive compensation for these risks, especially in equities, where we stick to our overweight. We are positive on the hard-hit tech sector, even as some high-flying tech shares remain expensive. In fixed income we prefer selected hard-currency EM debt. It provides some insulation against currency declines and looks relatively cheap versus local-currency debt.

Week In Review

• The Fed raised rates, with most of the FOMC supporting another hike by year-end. The Fed chairman said the economy remains strong, with further gradual rate increases appropriate despite risks to the outlook. U.S. 10-year Treasury yields fell. The curve between two and 10 years flattened. U.S. consumer confidence hit an 18-year high.

• Italy’s bonds and bank stocks came under pressure after Italy released a draft budget targeting a fiscal deficit of 2.4 percent for 2019 to 2021, higher than expected and much larger than EU limits.

• Brent crude prices hit a four-year high. OPEC signaled it won’t increase output preemptively, and concerns grew about supply shortfalls related to U.S. sanctions on Iran. Global equities fell. The president of Argentina’s central bank resigned, and the IMF increased its credit line to Argentina.

Week Ahead

Brazil’s election comes after a drawdown in EM assets this year and amid rising support for populist agendas across Latin America (see our geopolitical risk dashboard). Polling suggests no candidate will win more than 50 percent of the vote in the first round. This would likely lead to an Oct. 28 runoff between right-wing Jair Bolsonaro and left-wing Fernando Haddad. Local assets look set for volatility in the weeks ahead. Brazil’s economy, South America’s largest, is fiscally fragile and still recovering from a sharp recession. The winning candidate’s approach to pension reform and public spending will likely be a key driver of market expectations around Brazil’s growth potential.

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