December is traditionally a time of indulgence, but it is also when we take stock of the passing year and contemplate what may lie ahead. Beyond any religious considerations, many people will also be looking at whether their investment portfolios need to be tailored to take account of macro trends. And there is probably no more pressing issue than the likelihood of a prolonged period of rising inflation, intertwined as it is with the progression of the virus and the consequent impact on supply chains.
There have been countless articles published on how inflation influences equity valuations. The short consensus seems to be that it is favourable over a limited timeframe, but is a destroyer of value if it drags on. And its effect is not uniform; it differs across a range of sectors and locales. For the purposes of this article, we will confine our ruminations to the emerging markets (EM) space.
Your exposure to this corner of the market will probably depend on the risk profile of your portfolio. Fund managers now promote EM investments as a viable source of dividend income, on top of the usual growth narrative. It’s a sign of growing maturity which is also reflected in the steady increase in weighting ascribed to emerging economies in global equity indices.