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Preparing for Take-Off: 2023 Emerging Markets Outlook
Looking into 2023, we see pockets of significant upside potential within Emerging Market (EM) equities. Broadly speaking, we see three key positive catalysts which could translate into a significant uptake for EM allocations:
- The reopening of China’s economy: The Chinese Communist Party (CCP) began signalling changes to its zero-Covid Policy in November and continued to loosen controls through the first half of December. We see this as a powerful catalyst for domestic Chinese cyclicals.
- A turn in US economic data translating into a weaker US dollar (USD): We are keeping a close eye on US unemployment, as any signal of weakness could translate into near term softness in wages and service inflation. This could allow the US Federal Reserve (Fed) to signal forthcoming adjustments to its monetary policy.
- Incremental GDP growth in favour of EM: A China reopening, rates coming down in Latin America, the Gulf Cooperation Council continuing its IPO surge, all while the US hikes rates into a potential recession should create a powerful backdrop for EM outperformance.
- Asia ex-Japan: While global growth will likely slow in 2023, Asia looks to be a positive counterweight. This is especially true for China, where we see growth accelerating as authorities soften the zero-Covid policy and introduce easing property measures. For the rest of Asia ex-China, although headwinds from external demand still exist, the easing of financial conditions in 2023 should extend the runway for growth in domestic demand, which we expect will drive Asia’s outperformance.
- Latin America: As a region, Latin America presents an interesting market landscape, benefiting from higher energy prices and oil exports. If we see a strong recovery in Chinese GDP growth, Latin American countries should be key beneficiaries from a price rebound in materials. Perhaps most importantly, central banks in the region have been prudent in raising interest rates to fight inflation well ahead of the Fed. This has created a strong interest rate differential, which has and should continue to protect currencies through global market volatility.
- Eastern Europe, Middle East & Africa (EEMEA): The outlook in 2023 for EEMEA remains divided. The Middle East and North African countries stand to benefit from elevated oil prices, their USD pegs, and continued social reforms. South Africa’s performance is likely tied to both China’s reopening as well as commodity prices. We remain cautious on Turkey due to the unorthodox monetary policy in the face of rampant inflation. Greece should be able to better-manage the uncertainty present in the Eurozone due to the continued recovery in the tourism industry and improving domestic fundamentals. Poland, the Czech Republic, and Hungary remain the most affected by weakness in Western Europe and the war in Ukraine.
January 12, 2023
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