Head of Mackenzie’s global quantitative equity explains some of the market dynamics introduced by conflict, and where buying opportunities might be found
Arup Datta gauges his daily success by answering one key question: are we navigating the markets well. Datta is an SVP with Mackenzie Investments and Head of the Mackenzie Global Quantitative Equity Team. Running a stock-picking quantitative strategy, Datta is constantly assessing and reassessing what is working, what isn’t, and why dynamics on emerging markets are changing. Since the outbreak of the US-Israeli war against Iran, he has watched and reacted to emerging markets in flux.
While certain emerging markets have been among the hardest-hit equity exchanges in the wake of this conflict, and the energy shock that comes with Iran’s closure of the Strait of Hormuz, Datta reports that his active EM strategies have been able to outperform EM index investments each month of this year. He explained why he’s been able to outperform, where he sees the biggest economic impacts of this war on EMs, and why a shock to emerging market performance may catalyse another round of buying opportunities for Canadian investors and advisors.
“In EM, usually in every market, when markets draw down, less volatile stocks hold up better. We call it the low volatility anomaly. That is holding up everywhere [in EMs] We have low volatility strategies versus regular strategies, and those low vol strategies are doing better almost by definition because they have more downside protection. So that's playing out throughout the world,” Datta explains. “However, in developed markets, value is getting trounced. It's all about growth and quality or more about those. In EM, value is the one in the lead.”
Developed markets, Datta explains, are likely being driven to quality and growth by the prospect of this conflict and its energy shocks keeping US CPI and the US Fed’s index rate higher for longer. The prospect, he explains, is that the mega-cap tech names are more capable of enduring higher rates than smaller-cap value names. EMs, however, appear more insulated against interest rate shocks. Instead, EM investors are viewing higher energy prices as a growth headwind, resulting in better performance from those low vol value names.
While Datta’s strategy is far more focused on specific names within different emerging markets, he broke down some of what tends to perform better and worse across EMs during an energy shock. Latin America and South Africa, he explains, usually hold up better as they tend to be energy and commodity exporters.
China has some negative exposure to energy shocks as it is a huge oil importer, but the country has built up a significant strategic petroleum reserve as well as moves towards a more diversified electrical grid. India may be the most exposed of the major emerging markets, in Datta’s view, given that country’s significant reliance on gulf hydrocarbons currently stuck behind the Strait of Hormuz.
That exposure to energy shocks, however, may present a buying opportunity for investors willing to endure some volatility. Datta’s hope and expectation is that some degree of normalcy resumes with the eventual end of this conflict. Once energy flows back to these key emerging markets, many of their growth drivers should return. India’s NIFTY 50 index is down over 12 per cent in the past month, losing what Datta describes as an ‘India premium’ that its market has traded at for some time now. He believes that an end to this conflict should see the eventual resumption of Indian equity market strength.
2025’s story in emerging markets was a bit of a reversal of broader trends. Datta explains that two key laggards in recent years, China and South Korea, became leaders in EMs while India lagged after leading EMs for several prior years. This energy shock, and the damage done to the India premium, could present another chance at a reset for investors. Datta sees a better entry point for Indian and some other emerging markets given the geopolitical and energy overhangs.
Those overhangs, however, are still a source of serious short-term volatility. The full flow of Arabian oil and gas may take a long time to resume, and impacts on key seasonal goods like fertilizers may have further impacts on the global economy. Still, he notes that conflicts of this nature are difficult to end unilaterally. Datta believes, though, that these conflicts tend to resolve and that businesses and governments often take these moments of vulnerability to build redundancies and reshape supply chains. He notes the Saudi construction of a pipeline to the Red Sea as an example of the kind of infrastructural shifts we may see after this conflict.
While the exact end of this conflict is impossible to predict, Datta believes that a resolution should come relatively soon, if only because the White House has demonstrated it is only willing to take a certain amount of volatility on equity and bond markets before it changes policy. When that shift occurs, which we may already be seeing, there could be a resumption in emerging market upside. For Canadian advisors whose clients may have missed out on some of the EM run over the past 15 months, Datta says the re-entry opportunity could be significant.
“This is a better entry point now than three weeks back. In my view, and I do believe, and most people will agree, that EM continues to look cheap compared to especially US large cap,” Datta says. “That gap has been closed down a bit given the last 15 months. But there's still a wide valuation gap and there's a lot going on.”
