Investors in emerging markets are always hopeful. “This will be the year.” That is one of the very hackneyed phrases in the field of investment that does not always end up being fulfilled. In over a decade, it’s a space where returns have been below average. But, perhaps, and therein lies the question, the next exercise could be different. At least, there is some reason to think so, according to some experts.
The asset class had its last sustained bullish rally ten years ago. The iShares MSCI Emerging MarketsEEM exchange-traded fund has lost a quarter of its value since January 2021, while the S&P 500 Index has gained 4%. That is the current photograph that could be flipped.
The 2023 image could actually be brighter. Emerging markets could shrink from both poles of the global economy “All eyes are on the path of the dollar and the reopening of China,” says Gaurav Mallik, chief investment strategist at State Street Global Advisors. “We are cautiously optimistic both ways,” he adds.
“Apart from China, 2022 wasn’t too bad,” says Jitania Kandhari, head of emerging-market equities research at Morgan Stanley Investment Management. Nine of the top 10 stock markets this year we saw in emerging markets, from Brazil and Mexico to Indonesia and Thailand. Developing countries borrowed little during the pandemic and raised interest rates early to fight post-pandemic inflation, positioning them to ease next year. “With stocks trading at crisis levels, it looks like a good backdrop,” says the analyst.
Waiting for takeoff
Chinese consumer stocks are an obvious place to capitalize as Xi Jinping’s government abandons ‘covid zero’, according to Tom Masi and Nuno Fernandes, co-heads of emerging markets strategy at GW&K Investment Management. “The Chinese consumer will come back with a vengeance, just like in the West,” says Masi. “They are looking to ride that wave with shares like the fast food franchise Yum!, hotelier H World Group HTHT and casino operator Sands China 1928,” these analysts say.
For his part, Andrew Keiller, director of emerging markets equities at Baillie Gifford, prefers the substantial presence of China in future technologies. Top picks for him include Contemporary Amperex Technology, or CATL, the world’s leading maker of batteries for electric vehicles, solar powerhouse Longi Green Energy Technology and biopharmaceutical company BeiGene.
“A Fed pivot should boost emerging market currencies and bonds,” says Michael Arno, global fixed income analyst at Brandywine Global Investment. The expert is betting on the currencies of Thailand and Indonesia, which would also benefit from renewed Chinese tourism, and Colombian sovereign bonds, which he believes have overreacted to the election of leftist President Gustavo Petro.
Omotunde Lawal, head of emerging markets corporate debt at Barings, is mining for gold amid the dregs of struggling Chinese developers, while Beijing commits billions to rescue its critical property sector. “These names have risen from 5% of face value to perhaps 12%,” they state. “Hovering recovery planes pay 30% to 50%.”
There are some problems with these hopeful scenarios: The Fed may not pivot and China may not reopen again. State Street’s Mallik is particularly cautious on that second premise. “Many times we have seen China go one step forward and two steps back,” he notes. “We are in a wait and see position for now,” he adds.
Even if both conditions are met, the eclectic managers’ picks are a rounding error in an index of emerging markets led by Chinese internet giants Tencent Holdings and Alibaba Group Holding, and chipmakers Taiwan Semiconductor Manufacturing and Samsung Electronics. No one seems very enthusiastic about the big four. Still, in a year when market returns won’t be easy, there are many things worth watching in emerging markets.
