What investors in emerging markets to watch for in 2023

 

• The slowing of interest rate hikes in the United States and other major economies could set the stage for an emerging markets recovery in 2023

LONDON: It's been a rough 12 months for emerging markets, where more governments stumbled into default, currencies tumbled and double-digit losses in stocks and bonds alike - although many investors remain optimistic that 2023 may bring some relief.

Below are the events, trends and themes that investors expect to shape the outlook for emerging markets over the next year.

1) high rate, low growth

The slowing pace of interest rate hikes in the United States and other major economies could set the stage for a recovery in emerging markets in 2023, bringing much-needed relief from a soft dollar and falling inflation.

Developing economies are expected to cling to their growth gap compared to developed peers, but fears of a recession in the United States as well as in Europe weighed on global markets generally – especially in the first half of the year. I am having a moment.

"Economic downturns as well as aggressive monetary tightening and the geopolitical and commodity shocks that prompted them will be temporarily painful across financial and emerging markets," said David Folkerts-Landau, group chief economist at Deutsche Bank.

If emerging central banks do not have room to lower interest rates for most of the year, the recovery could be delayed.

2) China is reopening


China's reopening after its COVID-19 lockdown will be bumpy, but it is likely to accelerate at a time of slow global growth, which accounts for about a fifth of global GDP.

Analysts expect a sharp jump in consumption and investment in the world's second-largest economy from mid-2023.

"If you look at the savings rate for China right now, it's very high," said Eric Zipf, head of emerging market equities at DuPont Capital. "We think that as soon as people feel comfortable going outside, this spending is going to provide a huge tailwind from an economic perspective."

3) War in Ukraine

Russia's invasion of Ukraine shook markets and the world economy – and how the war plays out in 2023 could be less important, whether it be continuation, escalation or progress towards finding a solution.

Globally, the war has transformed energy markets and pressures on inflation, food security and geopolitical risk perception – factors that are often felt more keenly in emerging economies. Emerging Europe has also felt the immediate humanitarian impact – from refugee movements to Russia's brain drain.

4) Debt Reform

A growing list of countries in debt crisis in the wake of COVID-19 and the war in Ukraine: Zambia and Ethiopia are trying to reduce debt burdens under the Group of 20 Common Framework. Sri Lanka and Ghana missed out on 2022.

But a more complex mix of creditors - including the rise of China as the world's top bilateral lender - has made proceedings slower and more complicated than in previous episodes of the debt crisis.

"It's quite a challenge to have them all sing the same song in the same key," said Tim Samples, associate professor of legal studies in the Terry College of Business.

The number of countries opting out of capital markets is at a historic high amid smaller, riskier economies – though savings may be a blessing in disguise.

"There really isn't a lot of debt maturing next year," said Carmen Altenkirch, emerging markets sovereign analyst at Aviva Investors. "The country that is probably most at risk is Pakistan."

5) Brazil under Lula 2.0

President-elect Luiz Inacio Lula da Silva will take office on January 1, with markets already looking for signs of a fiscal anchor to rein in spending in Latin America's biggest economy.

Policymakers have highlighted the inflationary risks posed by da Silva's proposal to spend 168 billion reais ($31.6 billion) to fulfill campaign promises.

Gordian said, "Investors want to know whether debt-to-GDP in Brazil is explosive or under upward pressure, are we hitting 100% debt to GDP anytime soon, or are we It can stabilize in the next two or three years." Kemen, Head of EM Sovereign Strategy (West) at Standard Chartered Bank.

6) Turkey Election

President Tayyip Erdogan could face his biggest political challenge in his two decades in power as Turks head to the ballot box in the most high-profile vote in emerging markets.

The country has been grappling with rising costs and a depreciating currency, with the lira falling to a record low against the dollar in recent days. Years of unconventional monetary policy have seen many investors reduce their risk exposure to the country's assets. A change in leadership could mark a stellar turnaround.

"This is potentially the most interesting story of 2023," said David Honore, Head of EM Cross-Asset Strategy & Economics, EMEA, Bank of America Global Research.

7) Voting