2022 has been a tricky year for investors in emerging markets (EM). Russia’s war in Ukraine, US dollar strength, high inflation and a global economic slowdown have all weighed on returns. Now is the time for investors to work out what comes next. Looking ahead there are three key catalysts which should support EM equities going into 2023.
US dollar remains key to emerging markets’ fortunes
There is a strong inverse relationship between the performance of EM equities and the strength of the US dollar, meaning that when the US dollar is strong emerging markets tend to perform poorly and vice versa. As a result, many emerging markets have suffered in 2022 as the dollar has strengthened off the back of hawkish central bank policy (aimed at reducing inflation by reducing interest rates) and market volatility. The key driver behind all of this has been persistently high levels of inflation in developed markets. Why has inflation been more of a problem for developed markets than emerging markets? The answer lies in the gargantuan pandemic-era monetary response from central banks in the UK, Europe, and America. Huge programmes of quantitative easing and monetary support were announced during covid in developed markets, but emerging markets did not indulge in the same largesse. Inflation rates now bear witness to these two very different approaches. For example, the current inflation rate in India is 6.7%, compared to 7.7% in the US or 9.6% in the UK. We believe that inflation in developed markets will begin to fall in 2023 and central banks will stop raising interest rates. Indeed, some leading indicators (factory gate prices, shipping rates and inflation expectations) indicate that global inflation rates have already peaked. This should increasingly put downward pressure on the dollar, creating a supportive environment for emerging market outperformance.
Pragmatic approach to covid policy is vital for Chinese recovery
China has been in a prolonged bear market with the Shanghai Stock Exchange down significantly over the past couple of years. This has been caused by two main factors: the ruthless adherence to a ‘zero-covid’ policy, and a slump in the domestic property market. China’s adherence to a strict zero-covid policy has significantly impacted its economy and acted as a major headwind for Chinese companies. Recently, there seems to be a change in the direction of travel within China with regards to their approach to Covid. The official rhetoric is softening, with greater recognition that the country must make the same trade-offs between the health of the population and the health of the economy that most Western nations had to grapple with. The continued relaxation of the government’s approach to zero-covid, should buoy Chinese stocks.

China’s property market contributed almost one third of China’s GDP in 2020. Following a number of high-profile property developer failures in 2021 and 2022 some economic commentators thought this may presage China’s ‘Lehman moment’. Battered consumer confidence and, until recently, limited government support significantly impacted the sector. The startling decline in the property market has been partly exacerbated by China’s zero-covid policy, which made both the practical aspect of buying a house tricky, but also negatively impacted consumer and business confidence. The central government have now announced a sweeping support plan for the property sector, covering banks, homebuyers and developers. The additional confidence of this policy response has already seen the sector respond very strongly, with the MSCI China Real Estate (USD) sub index up more than +50% during November.

Finally, the geopolitical tensions that had built up between China and the USA seem to have been reduced following the meeting of Presidents Xi and Biden on the sidelines of the G20 summit in November. A more pragmatic and conciliatory struck tone between the two leaders recognised that if the two largest economies in the world are at loggerheads, no country prospers. Although this is a small step in a long path back to a reconciliation, we believe it is a step in the right direction and provides momentum for further progress to be made. Ultimately, we believe that these positive roots of news will help lift many of the headwinds Chinese stocks have faced this year and should provide a platform to bounce back in 2023 against a backdrop of attractive valuations.
Outlook 2023: Is the time ripe for Emerging Markets?
Clear runway for growth

Finally, with developing world growth slowing materially, the growth differential between EM and developed markets should continue to become more pronounced. For example, India is predicted to grow at 8% next year, contrasting starkly with the recessionary concerns for the US. This is not an anomaly either. Many developed markets are facing looming recessions while emerging markets economies are forecast to grow. A good illustration of the stark difference in economic outlooks between companies in developed markets and companies in emerging markets can be found in India. The CEO of India’s largest privately-owned bank recently said, “I have growth pouring out of my ears”, expressing a concern about how to best execute the massive growth he expects…a nice problem to have! This makes emerging markets very attractive to us, from both a growth perspective and on current valuations. We believe that the best opportunities within the asset class will be companies with high returns on capital, a strong moat (a long-term economic advantage that allows a company to protect its market share from competitors), and that continue to reinvest to grow their businesses over time. Therefore, while 2022 has been a challenging year for investors in emerging markets, we believe that the asset class is on the cusp of a recovery, supported by a softer US dollar and a recovery in China.


Of course, investing in emerging markets carries greater risk than investment in more traditional western markets. This may result in large falls in the value of the investments over short periods of time.  Less developed countries may face more political, economic or structural challenges than developed countries, some investments may become hard to value or sell at a desired time and price.

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A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

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