Emerging Markets (EM) assets were subject to three strong headwinds in 2022, namely, China’s zero Covid-19 and real estate crisis, aggressive interest rate tightening from the US Federal Reserve (Fed), and the Russia invasion of Ukraine.
The world is in a very different macroeconomic position today compared to the prior forty years.
Even though the medium-to-long term US Dollar fundamentals remain unimpressive, due to a combination of large external imbalances, a continuous dependence on foreign investors’ inflows and the weaponisation of the currency, the Dollar became the least bad currency in G4 since the beginning of the Ukraine war
The Russian invasion of Ukraine is a shock to the existing world order. From an economic perspective, the initial impact of the war is rising inflation given the importance of Russia and Ukraine in the supply of commodities to the world.
The global macro environment is ripe for EM assets outperformance as a combination of stronger growth in China, the end of exceptionalism in the US and less uncertainty on US interest rates, lead to a strong backdrop for EM assets.
Chinese property markets are going through a significant slowdown that began in Q2 2021. The average slowdown in the previous episodes over the last 20 years lasted four quarters.
The fiscal and monetary policy responses to the Covid-19 shock aided demand and allowed for a v-shaped economic recovery starting in 2020. Further fiscal stimulus boosting demand in 2021 were met with supply shocks, bringing US and EU inflation to the highest levels since 2008. Emerging Markets (EM) experienced some inflationary pressures, albeit much more modest than Developed Markets (DM).
The country’s leadership has designed a new development model, based on a ‘common prosperity’ philosophy, aimed at modernising the economy by improving the country’s future demographic profile via lowering inequality and promoting sustainable, even if slower, GDP growth which is both less dependent on financial leverage and in harmony with nature.
What is the degree of Emerging Markets (EM) stocks’ undervaluation relative to United States (US) equities?
The Fed meeting last week led to higher asset price volatility across asset classes.
Inflation is likely to remain high in 2021. The primary source of price pressures is the rebound in commodity prices after their sharp collapse last year.
The 2015 Paris Agreement introduced the legally binding goal of maintaining the average global temperature below the pre-industrial revolution average plus 2o Celsius in order to avoid severe stress on natural and socioeconomic systems.
The Emerging Markets (EM) asset class is often labelled a commodity play for investment purposes. The argument is simple and directional; EM countries export commodities, so rising commodity prices are good for the asset class, whereas falling commodity prices hurt EM countries.
Science is winning the battle against the covid-19 coronavirus. The advance in therapies has already contributed to a significant reduction in hospitalisation and fatality rates vis-à-vis the number of cases, while the multiple of approved and soon to be approved vaccines puts the livelihoods of billions of people on track to normalise in 2021.
Noise levels are likely to remain elevated in the run-up to – and possibly in the immediate aftermath of the upcoming US presidential election, but the post-election outlook should prove positive for EM assets by ushering in a period of more positive risk-sentiment, a long period of low US rates and a lower Dollar.
Overall, EM IG bonds represent a great opportunity for investors seeking to monetise the EM risk premium with moderate volatility in a world, where higher yielding IG-rated securities are increasingly difficult to come by.
Following another year of strong returns, Emerging Markets (EM) fixed income has outperformed developed bond markets by a significant margin over the past four years. The outperformance is likely to continue in 2020, because EM fixed income remains attractively priced both in absolute terms and relative to bonds in developed markets as well as under-owned and well-supported by an improving fundamental backdrop.
Investors are suddenly much more concerned about the political transition in Argentina. The country’s stock of debt is large but not unmanageable, with a path to avoid default and to boost growth in sight.