Wednesday, January 19

Emerging markets expected to rise in 2022, but not until July

Emerging market assets are projected to rise in 2022 as moderating inflation and accelerating growth deliver gains, but this won’t happen until the second half of the year.

That’s the consensus among investors like Goldman Sachs Group, Morgan Stanley and JPMorgan Chase & Co., who spoke with Bloomberg about the outlook for developing nations stocks, bonds and currencies for the new year. As for the details, they are looking for a rally in Chinese equities and gains on local currency bonds in countries such as Poland, the Czech Republic and Hungary.

A mid-year recovery would mark a sea change for a sector that is about to conclude its worst year since 2018. While this year’s narrative has been dominated by rising consumer prices, disparate vaccine launches Covid-19 and gains in the US dollar driven by tightening expectations from the Federal Reserve, better variables may come into play later in the year. Investors already see signs of recovery as policy makers tighten up on inflation as rates boost, while a spike in US growth may return the upper hand to developing economies, they say. .

“2021 has been a year in which developed markets outpaced emerging markets in economic growth, and this must be reversed,” said Tai Hui, chief Asia market strategist at JPMorgan Asset Management in Hong Kong.

Rising vaccination rates in some economies will provide a more favorable context, just as signs emerge that supply chain problems may be stabilizing, Hui says. In addition, official US rates could remain lower than headline inflation, intensifying the search for income.

That would be a welcome change in the fortunes of investors in countries whose economies account for more than half of the world’s gross domestic product. The MSCI indicator of emerging market equities has fallen more than 5% this year, trading near the lowest level since 2001 relative to US equities. Local currency debt is heading for the worst year since 2015, while dollar bonds are heading for their third loss since the 2008 global financial crisis.

Those disappointments underscore how growth rates among emerging nations have been unable to keep pace with their wealthier counterparts. While developing economies were expanding an average of 2.5 percentage points faster than their developed peers before the pandemic, that was down to 1.3 percentage points this year, in part due to a shortfall of stimulus to counter the pandemic, say the investors.

But with the Fed taking an aggressive turn and signaling three rate hikes in 2022, US growth may peak. And that, together with a revival of economic activity in emerging markets, could help widen the spread again.

At least 23 emerging and border countries have raised rates this year, which could have a moderating impact on inflation and boost real returns on emerging market assets, especially local currency stocks and bonds. At the same time, the increase in shipments from Asia suggests that bottlenecks in the supply chain may be decreasing, which also eases pressure on prices.

Another factor likely to work in emerging markets’ favor is China’s policy easing stance. The country’s authorities, which typically account for a third of all major developing economy indices by weight, are stepping up support for an economy under pressure from the repression of the housing market. In the latest move this month, Chinese banks cut borrowing costs for the first time in 20 months.

Below are some of the biggest calls from emerging market investors for 2022.

Eric Zhang, Head of Tactical Positioning, Global Balanced Risk Control Team at Morgan Stanley Investment Management

“We expect inflation to likely start to decline next year for both emerging and developed markets as the basics begin to show. Supply chain restrictions should also begin to ease.”

Big bets: Chinese equities, top-yielding currencies, including the Brazilian real, the Mexican peso, and the Russian ruble.

Kamakshya Trivedi, Co-Director of Research, Emerging Market Strategies, Foreign Exchange Rates and Global Currencies, Goldman Sachs

“We expect the dollar to have a limited range. It’s hard to see much dollar weakness as there are countervailing forces. ”

Big bets: Eastern European currencies, Chinese stocks.

Jean-Charles Sambor, Head of Emerging Markets Fixed Income at BNP Paribas Asset Management

“If the Fed embarks on a very aggressive tightening cycle or if China decides to keep its real estate policies extremely tight, emerging market assets would suffer even more. Neither of these two scenarios are central scenarios. ”

Big bets: High-yield bonds from China, external debt in West Africa, local bonds in Poland, the Czech Republic and Hungary.

Arun Sai, Senior Multi Asset Strategist, Pictet Asset Managementment

“Our economists forecast that the growth differential of emerging markets versus DM will narrow in the second quarter of 2022 and begin to recover in the second half. Assets in emerging markets typically outperform along with accelerating relative economic momentum. The cooling of US growth in line with the growth trend is also positive. Emerging market assets tend to have trouble when America is too hot. ”

Big bets: Banking stocks, ASEAN reopening opportunities.

Damien Buchet, investment director of Finisterre Capital

Policy relaxation in China will be quite critical, more for sentiment than real fundamentals. China may not relax en masse, but it is the signal it will send that will comfort.

Big bets: Bonds in local currency, external debt of oil producers such as Oman, Angola, Iraq, Ecuador, external debt of stressed countries such as Sri Lanka, Tunisia.

Ian Samson, Portfolio Manager, Fidelity International

“The launch of vaccines has been too slow in most emerging markets. The good news, however, is that some degree of herd immunity appears to have been achieved as India, Indonesia, the Philippines and beyond all experience controlled epidemic situations. At last, 2022 could be the year these emerging markets get the reopening boom that most developed markets have experienced this year. ”

Big bets: Indonesian equities, Chinese equities and high yield debt, Central European currencies.

Anupam Damani, Co-Head of Global Fixed Income Portfolio Management at Nuveen

“If the Fed accelerated its tune-up, leading faster and higher rate hikes in mid-2022, financial conditions would tighten and pose greater risks to emerging market debt both from an inflow perspective and due to inflation. slower growth implications overall. ”

Big bets: Sovereign and corporate bonds in hard currency, local bonds.

© 2021 Bloomberg LP

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