Last year was a challenging one for emerging market equities. The MSCI Emerging Markets Index dropped by almost 5 per cent, while its developed market counterpart rallied by more than 20 per cent, leading to its worst performance since 2013. However, the situation seems to have reversed since the start of this year with emerging market equities faring better than their developed market counterparts. Could we see a return of emerging market equity outperformance in 2022? One factor likely to work in favour of emerging markets is China’s policy easing. The performance of Chinese equities is key to the outlook for emerging market equities, given that it accounts for around a third of the overall emerging market index. Amid China’s normalisation of monetary and fiscal policies, and its regulatory tightening of the property, technology and high-emissions sectors, the MSCI China Index was down more than 23 per cent last year. Beijing has moved to a modest easing mode since last July and we have seen a more dovish shift in recent months, which is likely to boost investor sentiment for Chinese equities. Chinese policymakers have rolled out several monetary and fiscal easing measures recently. In addition to injecting liquidity through quantitative tools, such as cuts in the banks’ reserve requirement ratio in December, the People’s Bank of China (PBOC) has cut interest rates in recent weeks to help lower funding costs for businesses. The release of fiscal stimulus is also under way, with clear support for infrastructure investment – the Ministry of Finance has approved 1.46 trillion yuan (US$230 billion) of quotas for local government special bonds for the first quarter. The PBOC’s recent press conference also suggests that Chinese policymakers are more concerned about downside risks to growth, so expect Beijing to step up its easing efforts in the coming months. In contrast, macro policy has turned less dovish in the major developed economies, and removal of policy accommodation is likely to be a headwind for developed market equities this year. While previously, major developed market central banks were mainly focused on downside risks to growth, they have recently become more concerned with insuring against excessively high inflation . Almost all major developed market central banks are in the process of scaling back their quantitative easing programmes and the Bank of England raised its policy rate by 15 basis points in December. US inflation: how did forecasters get it so wrong? Furthermore, there has been a noticeably hawkish shift in the US Federal Reserve’s monetary policy outlook in the past few weeks. The minutes of the December Federal Open Market Committee meeting indicate strong support for interest rate increases this year. The market expects lift-off in March and a total of four rate rises this year, compared to last October when only one increase was expected. The minutes also showed a widely held view on the committee that the Fed should begin to reduce the size of its balance sheet, which is the reverse of quantitative easing, soon after the first rate rise. Another factor likely to support emerging market equities is a widening growth differential relative to developed economies. The gap narrowed notably last year mainly due to slower economic growth in China. China’s fourth-quarter GDP data, however, shows signs of stabilisation in growth momentum and the recent policy easing measures should support further improvement. Historically, a rapid increase in developed market interest rates tends to be problematic for emerging market equities. While China is less vulnerable to tightening financial conditions in major developed economies, it could pose a challenge for other emerging markets. Moreover, the prospect of higher US rates is likely to keep the US dollar supported in the short term, which also tends to weigh on emerging market equities. Further, there are risks to China’s near-term growth due to lingering weakness in the property sector and recent Covid-19 outbreaks led by the Omicron variant. China’s service-sector consumption is likely to remain sluggish in the first quarter as more local governments impose tighter restrictions on movement. Elsewhere in emerging markets, low vaccination rates in parts of South Asia and emerging Europe suggest they are likely to be more vulnerable to a resurgence in Covid-19 cases led by the new variant, which is also likely to strain their health care systems. Overall, emerging market equities seem better positioned to outperform developed market equities this year, given the more favourable China policy backdrop and growth environment compared to last year. Nevertheless, near-term growth is a worry, especially because of the virus situation in emerging Asia. Further easing measures from Beijing and an improvement in China’s growth momentum are likely to trigger a more positive reaction in equities, although this could be more of a second quarter story once we have clarity on the impact of Covid-19 and policy easing. Sylvia Sheng is a global multi-asset strategist at JP Morgan Asset Management