Emerging Market (EM) equities were volatile throughout the month of May, at one point declining by 8%, before retracing the losses to finish up 46 basis points on the month. This registered slight outperformance relative to the MSCI All-Country World Index (+18 basis points) and the S&P 500 (also +18 basis points on the month).

The Russia-Ukraine war continues to have wide ranging impacts on energy and food prices, supply chains, inflation, and interest rates. Curtailments to exports of Ukrainian grains and Russian fertilizer have significantly raised prices throughout the agricultural value chain, leading to strains in food supply, in part fueling social unrest in nations such as Sri Lanka. In a surprise move, India, the world’s second largest wheat exporter, banned exports. With limited spare refining capacity in the world, regional shortage of refined product such as diesel fuel have started to emerge.

China continues to struggle with COVID, maintaining a strict zero-COVID policy, resulting in a 9-week lockdown of Shanghai, amid mass testing measures and aggressive steps to attempt to contain the spread of the virus. This has led to a sharp slowdown in economic activity and exacerbated strains to supply chains. The Chinese government responded to the slowdown by announcing a wide-ranging stimulus package consisting of 33 measures to support infrastructure, platform companies, renewable energy, autos, and appliances.

Despite US economic data showing accelerating downside surprises on the month, the broad US dollar basket (DXY) appreciated markedly during the first half of May, before retracing its gains in tandem with the counter-trend rally in risk assets in the back half of the month. The large constituents in the DXY, the euro and the yen, suffered amid the escalating inflation and geopolitical developments, leading the dollar to appreciate relative to developed market currencies. EM was more of a bifurcated picture, as commodity exporters, such as Brazil, exhibited currency strength, owing to favorable terms of trade, while North Asian currencies depreciated in tandem with the regional growth slowdown.

Latin American markets performed strongly across the board, led by smaller markets such as Chile and Colombia, while Brazil was +8% on the month, and Mexico was +5%, all performing substantially in excess of the index, supported by the continued strength in commodities, which supported bellwether companies in the energy and materials sectors, and rising interest rates, which benefited some of the large asset sensitive banks in the region.

Conversely, countries that are sensitive to commodity imports, such as India (-5% on the month) struggled amid ongoing commodity price strength. Middle Eastern markets struggled as well, as food prices escalated, representing a vulnerability for these economies, which are heavily import dependent.

Meanwhile, at the sector level, key contributors included Information Technology (IT) and Energy. IT staged a counter-trend rally that lacked meaningful fundamental catalysts, after being a notable underperformer for the first four months of the year. Energy continued its strength behind tightness in oil, gas, and refined product markets, supporting positive earnings revisions across the sector.

Key sector detractors included Health Care and Real Estate. The former struggled amid an ongoing sector-wide valuation de-rating, while fundamental catalysts have remained scarce. Real Estate faced the headwinds of rising interest rates, as well as an ongoing deterioration of sentiment toward the Chinese property market.