Year in review 2022 - 2023 | Global emerging markets

Global emerging markets (EM) have been volatile over the past 12 months with events such as the Russia–Ukraine conflict and Covid-19 lockdowns in China causing turbulence.

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In late 2022/early 2023, we saw some encouraging signs after China’s surprise reopening and some favourable global economic trends. Unfortunately, this was short‑lived, and sentiment reversed again following concerns over tighter financial conditions indicated by the US Federal Reserve (Fed) and the solvency of notable US regional banks. Rising geopolitical tensions between the US and China, and apprehension from China’s slow recovery, further soured market sentiment. 

Volatility is likely to remain, but despite this, we believe there are better times ahead for EM. As developed markets (DM) wrestle with recession concerns, many EM countries find themselves relatively well positioned thanks to healthier finances, proactive central banks, and significantly cheaper equity markets by comparison. 

Banks and IT are top performers 

Notably, the financials sector, particularly banks, have fared well. In EM, most countries have banks with strong liability franchises and a well-diversified depositor base which is stickier in nature. In addition, their funding costs are low, due to a higher proportion of funds coming from both current accounts (predominantly business accounts) and savings accounts. This means banks can be much choosier when deciding whom to lend to, and can focus on quality customers who are less likely to default.

Additionally, we believe that the risk of contagion from DM banks to their EM counterparts is limited, and EM are typically well positioned from healthy balance sheets and good levels of assets quality. 

The IT sector also emerged as a standout performer after battling strong macroeconomic and geopolitical headwinds in 2022. The sector received renewed impetus as signs of further easing in US inflation raised hopes that the Fed may pause its monetary policy tightening cycle. Developments around artificial intelligence also lifted sentiment higher. 

Emerging markets remain strong

Medium- to long-term fundamentals are reasonable today compared to the past, which leads us to believe that EM are well‑placed to provide positive returns. At a time when there is a cost-of-living crisis in DM, EM economies have been ahead of the curve in raising rates. When the Fed has pivoted, EM central banks have had a lot of room to cut rates. 

The growth profile of EM is also strong. For example, in India, ongoing investment into infrastructure and manufacturing is supporting the country’s rate of growth and in Korea and Taiwan, technology companies have already gone through an inventory destocking cycle which is expected to
normalise going forward. Furthermore, EM valuations are much more reasonable, with regional equities trading at a discount to DM that is close to 20-year highs.

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