The scheme of emerging markets that dominate Wall Street in 2023 is an approach that has been flying over the tables of the main analysts in recent months. For now, there are at least three reasons to think that economic growth in emerging markets will slow down in 2023, but the question is whether stock markets can do better than the benchmark international market in comparative terms.
According to David Rees, senior emerging markets economist at Schroders, his forecast that the United States will follow the euro zone and the United Kingdom into recession means global demand for goods is likely to soften. “This will pose a particular threat to the small, open economies of Asia, Central and Eastern Europe (CEE), and Mexico, which rely on exports to fuel growth,” he says.
Furthermore, while the reopening of the Chinese economy may support demand for natural resources, slowing global growth could likely weigh on commodity prices. “At the very least, this suggests that commodity-exporting emerging markets are unlikely to experience the terms-of-trade increases that are typically needed to fuel growth. And there is a risk that this engine will be reversed, ”he assures.
And to this we must add that the tightening of national economic policy will weigh more and more on growth. “Overall, fiscal policy is holding up as governments try to repair the damage done to public finances during the Covid outbreak, while the lagged impact of earlier interest rate hikes will also weaken demand,” it says. rees. “The deterioration in balance of payments positions means that rates may have to rise further in parts of Asia and Central and Eastern Europe if global financial conditions continue to resist,” she adds.
The good news, however, is that inflation in emerging markets is around its peak and should start to decline in the course of 2023. The impact of the sharp rise in commodity prices after the Russian invasion Ukraine in early 2022 will start to reverse as base effects on food and energy inflation become more favourable. And the combination of tighter policy and slower growth will eventually weigh on the underlying pressures.
The support of the emerging
Focusing on the negative would be a mistake. At least for these analysts. There would be four potential supports for emerging equity markets in 2023 and that may place it on a higher scale compared to developed markets: the move away from the zero-Covid policy in China, global disinflation, diameter or depreciation and valuations. which now price in weak short-term earnings expectations.
As for China and its change in policy, it could experience a cyclical recovery. The economy has been under pressure due to the zero interest rate policy and tensions in the real estate sector. The first has especially affected economic activity and has prevented the transmission of political support.
“China now appears to be moving to an endemic approach to managing the virus. The new domestically manufactured vaccines support a renewed push for vaccine penetration. Moving to an endemic state will bring waves of outflows, but will significantly reduce the risk of persistent macro pressure,” says Tom Wilson, head of emerging markets equities at Schroders.
Global disinflation, for its part, could continue to slow down until 2023. ) gained greater support for emerging currencies, which generally look cheap”, Wilson reviews.
The Federal (Fed) is acting successfully to re-anchor inflation and Fed expectations have peaked.
“A weaker US dollar would allow emerging market currencies to recover, easing pressure on central banks and emerging market financial conditions,” says the Schroders expert.
And the valuations are cheap? Global growth prospects for 2023 are poor and questions remain about the path of inflation and interest rates. However, valuations reflect a more difficult earnings outlook. Uncertainty and tensions can present opportunities over short-term benefits.
“We have started investing in stocks whose valuations seem attractive to us. In particular, we have reinvested in technology companies in South Korea and Taiwan that are offering good growth. Equity valuations are generally cheap compared to history and a rally in emerging market currencies would improve returns for US dollar investors,” says Wilson.
The economic outlook for 2023 is weak and uncertain, and volatility may remain high in the near term. Although a series of risks persist, among which the geopolitical tension between the United States and China stands out, the markets look ahead. “Valuations have improved, earnings expectations have reset and currencies are generally cheap, so 2023 may bring a peak in the money cycle and 2024 may bring better economic conditions,” adds Wilson.