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Stocks in emerging markets (EMs) have historically moved with commodity prices because big producers, from South Africa to Mexico and Brazil, make up a good chunk of the EM universe, meaning fluctuating commodity prices have an influence on their foreign exchange reserves and current account balances. However, this week’s Chart Room shows how that relationship has decoupled over the past few years as weakness in China has weighed on the EM index.

Commodities, on the other hand, remain buoyant. Although a global recession and a softer property market in China could impact prices in the short term, decarbonisation and other structural factors drive demand for raw materials crucial for the transition to a low-carbon economy. In core commodities such as copper, which is used in everything from solar panels to electric vehicle batteries, there will be a considerable supply/demand imbalance. A lack of political will to invest in new mines and energy sources, as well as ten years of underinvestment in the commodity complex, will make this shortage even more acute.

But other factors make us believe EMs will catch up with commodities. China’s economic recovery is underway and should gain steam as consumer confidence improves. Monetary policy is also conducive to growth, as EMs were generally ahead of the curve in raising interest rates to fight inflation, particularly in Latin America, where Brazil could cut rates as soon as August. In Asia, structural tailwinds are blowing in EMs’ favour: low-wage, high-skilled ASEAN economies, from Vietnam to Indonesia, are benefitting from the reconfiguration of supply chains, and demographic shifts in India tell another attractive long-term story. All this bodes well for EM equites and suggests their historical relationship with commodities could be restored.

Amber Stevenson

Amber Stevenson

Senior Investment Specialist