Investing in Emerging Markets after the great repricing
October 2022 | 3 min read
Investing in Emerging Markets after the great repricing
Global financial markets around the globe are facing a negative environment with rising uncertainty and geopolitical factors adding weight to the outlook. Emerging Markets (EM) have not been spared by these headwinds.
The ongoing conflict in Ukraine and the economic slowdown in China have further worsened inflationary pressures and harmed economic activity, contributing to a deteriorating growth outlook for next year.
At Amundi, we expect that 2023 could be marked by a soft landing for the US economy and a in our view a probable recession in Europe among the Developed Markets (DM), with the continuation of geopolitical tensions and an overall tightening of financial conditions.
In this complex scenario, investors may find opportunities in EM, depending on the evolution of several factors, such as:
| Increasing EM-DM growth differential: we believe would benefit emerging markets, especially in light of an improvement or stabilisation of China’s outlook |
Core rates stabilisation: as the hawkish stance of the Fed is now priced in, with a Fed pivot that could be supportive for EM assets |
EM inflation dynamics: as most EM have already started their hiking cycle contributing to a reduction of inflation. |
Looking ahead, we believe that the growth gap could be a supporting factor for EM, and a stabilisation in China could contribute to mitigate the general slowdown. We do expect growth in the next couple of quarters to be more in favour of EM, including the expectation of growth recovery in China in the next year.
China has seen a slowdown in growth due to the combination of its zero-Covid policy and issues in the real estate sector. We expect that the restrictions will be maintained for the majority of next year, hampering growth prospects, while the housing market will continue to trend down before stabilising next year.
In our view, rate hike cycles could prompt a recession in DM. We believe that most of the repricing of core rates has already occurred, and we are moving towards a new balance between growth and inflation. As we move ahead, further tightening of financial conditions and increased risks of recession may lead to a possible Fed pivot and a change in the monetary policy course.
Inflation may have already peaked in some EM and due to their proactivity, some central banks are now more advanced in their cycle, leading us to believe that they may have already completed their monetary policy normalisation. The expected inflation for 2023 is lower than the last reading, showing a descending trend.
We believe that the main risk could come from the tightening of financial conditions due to a more hawkish Fed increasing pressure on EM central banks and FX, combined with geopolitical risks on the background. Idiosyncratic risks and internal vulnerabilities could further increase EM fragmentation.
Our main conviction for the end of this year and the beginning of 2023 is that EM bonds offer an interesting entry point in absolute and relative terms. We maintain our preference for hard currency bonds, while we mantain a cautious stance on EM local rates and FX.
Later in 2023, we could approach a Fed pivot and a possibly weaker dollar, EM equities could start to benefit from a better backdrop from EM FX and the EM-DM growth premium as well as from attractive valuation. The key aspect will be a highly selective approach, focused on fundamentals and domestic growth.
In terms of mid to long-term perspective, we believe that Chinese and Asian markets may offer an interesting source of diversification*. Furthermore, growing investors demand for green, social and sustainability-linked bonds may benefit EM and low-income countries that are most vulnerable to the efcts of climate change.
* Diversification does not guarantee a profit or protect against a loss.
Source: Amundi, as of 24 October 2022
IMPORTANT INFORMATION
Unless otherwise stated, all information contained in this document is from Amundi Ireland Limited and is as of 29 October 2022. The views expressed in this page should not be relied upon as investment advice, a security or service recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results. Amundi Ireland Limited is authorized and regulated by the Central Bank of Ireland.
Date of first use: 28 October 2022
Doc ID: 2916683
Learn more about our Convictions
Powered by Amundi Institute