Economic growth and inflation have surprised to the upside so far in 2023, not only thanks to the reopening of the Chinese economy, but also due to the resilience of the labour markets.
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.
Successful investing in Emerging Markets is inextricably linked to a deep understanding of Environmental, Social and Governance (ESG) factors.
The terminology ‘Frontier Markets’ inspires images of exotic geographies, colourful politics and investor adventurism.
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.
Emerging Markets (EM) have demonstrated their resilience during the greatest economic shock since the Global Financial Crisis.
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.
2020 will live long in memory, and so it should. EM have navigated, and in some cases excelled, during the most challenging stress test in recent history. The crisis will ultimately prove temporary, in our opinion, and 2021 is well placed to be a year of recovery.
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.
Welcome to the 9th annual review of the Emerging Markets (EM) fixed income asset class. Using new data from the Bank of International Settlements and other sources, we establish that the EM bond market has expanded by 12% in Dollar terms in the past twelve months to a size of USD 29.6trn, or 25% of the global fixed income universe as of the end of 2019.
Does 9 times higher yield in EM than in US bonds make for an attractive investment proposition? We lay out the arguments.
The common characterization of US-China relations as a new Cold War is wrong. Instead, the most recent spike in tensions between the two countries – the second time this has happened since US President Donald Trump took office in 2016 – is primarily motivated by political considerations ahead of the November US presidential election.
As of 27 April 2020, eighteen times more people have died from coronavirus per million of the population in developed countries (DMs) than in Emerging Markets (EM). This is partly due to measurement problems, but there may also be genuine structural reasons for expecting slower spread, less overall incidence, and lower mortality rates in EM countries than in DMs.
Global stock markets have been struck by a triple shock; global pandemic, energy price war and market rout from full valuation levels in developed markets. Each of these types of shocks has been seen, and recovered from, previously.
The VIX index has spiked. Over more than twenty years, VIX spikes have been excellent guides to when to put money to work in EM fixed income and equities. Investors have, on average, generated 262bps of excess return in EM fixed income and 234bps of excess return in EM equities by putting money to work during VIX spikes relative to a ‘timing agnostic’ investment strategy.
Quantitative Easing (QE) policies in developed countries triggered a flight from yield in EM as investors pursued capital gains in developed markets instead. As the capital gains in developed markets fade and with yield nowhere to be found, a search for yield in EM has finally begun.
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.
Global growth is decelerating. Policy-makers in developed economies are gearing up for yet more fiscal spending. While fiscal spending may support growth for a short time, and for longer if very carefully applied, it will not change the growth outlook fundamentally.
Welcome to Emerging Markets! A huge array of economies all at various stages of development and maturity with different capital market structures. Add in as many different currencies, political frameworks and policy stances and the result is a complex, diverse, evolving and inefficient market universe.
Welcome to the 8th annual review of the Emerging Markets (EM) fixed income asset class. Using new data from Bank of International Settlements and other sources, we establish that the EM bond market had grown to a size of USD 26.5trn, or 23% of global fixed income at the end of 2018.
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.
The establishment of local bond markets has been the single most important structural change in Emerging Markets (EM) in the past quarter of a century. Many investors still fear local markets due to FX volatility, but EM local bonds have performed better overall than US Treasuries and US stocks.
Passive investment funds have grown in popularity and offer one key benefit, immediate market beta. However, investors beware! A passive approach to investing in emerging markets equity has several explicit and implicit ramifications. We consider seven here.
The case for Emerging Markets external debt is solid. The long-term risk-reward has been and remains compelling. The outlook over the medium-term also favours the asset class as the unwinding of distortions in global bond markets attributable to Quantitative Easing strongly favour EM over developed markets.
Demand stimulus has been in fashion in developed countries since the 2008/2009 financial crisis. Monetary policy in particular has been popular with zero interest rate policies and Quantitative Easing (QE) forming the backbone of macroeconomic policies in the UK, Japan, Europe and the United States. This may now be changing.
IMF recently lowered its growth rate forecast for the global economy. We expect growth to command a premium as it becomes scarcer, while growth laggards will be penalised. It is therefore important to unpack IMF’s global growth forecast to determine who is growing and who is slowing.
EM fixed income should deliver compounded returns ranging from 30% and 60% in Dollar terms over the 2019-2023 investment horizon as markets revert to unwinding the so-called ‘QE trades’ after a temporary US election related interruption in 2018. As for 2019 returns, they may be marginally stronger than the five-year average due to the pullback in 2018.