Analysis-In emerging markets, the bulls are back

by Marc Jones

LONDON – After some of the biggest losses on record in emerging markets this year, the bulls are back, betting that the time for a bounce has come.

With warnings that global interest rates are stabilizing, China eases COVID-19 restrictions and nuclear war averted, investment banks’ annual forecasts for 2023 suddenly have some pretty lofty predictions for emerging markets (EM).

UBSFor example, he expects emerging market equities and fixed income to gain between 8% and 15% in total return after falling 15% to 25% this year.

A “bullish” Morgan Stanley expects a return of around 17% on emerging market local currency debt. Credit Suisse “particularly” likes hard currency debt, while the latest BofA survey of global fund managers shows “long emerging markets” is the top “contrary” trade.

“It’s kind of a full risk reduction,” said Samy Muaddi, emerging markets portfolio manager at T. Rowe Price, who has begun to dive back into what he describes as “well-anchored” emerging market countries such as the Dominican Republic. , Ivory Coast and Morocco.

“Now, I think the price is attractive enough to warrant a contrary view.”

This year’s interest rate hike, the Ukraine war, and China’s battle against COVID-19 have combined to be a wrecking ball for EM.

It could be the first time in the asset class’s three-decade history that “hard currency” emerging market debt, the type typically denominated in dollars, will lose investors more than 20% on a total annual return basis. and the first run of 2 years of losses.

The 15% loss that local currency debt currently accumulates would be a record, while emerging market stocks have only had worse years during the 2008 financial crisis, the 2000 dot-com bust and the debt explosion. Asian in 1998.

“This has been a very difficult year,” DoubleLine fund manager Bill Campbell said. “If it has not been the worst, it is one of the worst.”

It is the experience of those past routes that has led to the current wave of optimism.

MSCIThe emerging market equity index soared 64% in 1999 and 75% in 2009, after losing 55% during financial and Asian market declines. Emerging market hard currency debt also saw a whopping 30% rally after its 12% run. GFC and the local debt that had lost little more than 5% went on to make 22% and then 16% the following year.

“There is a lot of value at today’s current levels,” added DoubleLine’s Campbell.

“We don’t think this is the time to blindly allocate to an emerging market trade, but you can start to put together a basket (of assets to buy) that makes a lot of sense.”


Analysts at Societe Generale said on Tuesday that cooling inflation and looming recessions in developed markets were “highly conducive to outperformance of local EM bonds.”

However, most of the big investment banks supported emerging markets to rally around this time last year. None predicted the Russian invasion of the Ukraine or the sky-high interest rates. There is an almost annual ritual of bankers talking about the possibilities of emerging markets, say those who have followed emerging markets for years.

BofA’s December 2019 investor survey showed that “cutting” the dollar was the second-busiest trade. JPMorgan and Goldman Sachs were bullish, while Morgan Stanley’s message at the time was: “I have to buy all EM!”

Subsequently, the dollar rose nearly 7% and major emerging market equity and fixed income indices lost money.

“You know how it works with a broken watch: at some point it could be fine,” said abrdn’s EM portfolio manager Viktor Szabo.


In addition to the Ukraine war, stubbornly high inflation and China lockdowns, mounting debt and borrowing costs mean credit rating agencies are warning of rising default risks in countries like Nigeria, Ghana, Kenya, Pakistan and Tunisia.

Nomura sees seven potential currency crises on the cards and though UBS is bullish on emerging market assets, estimating that this year has seen the biggest depletion of foreign exchange reserves since 1997. His forecast for global growth of 2.1% would also be the slowest in 30 years, shocks aside ends of 2009 and 2020.

“Our hope is that a more accommodative Fed will combine with a spike in the global inventory cycle/Asia tech recovery from the second quarter, creating more fertile ground for emerging market outperformance at that time.” . UBS said.

If the outlook really improves, international investors are well placed to come back, having sold large amounts of emerging markets in recent years.

JPMorgan estimates that some $86 billion of emerging-market bonds have been unwound this year alone, four times the amount sold during the “gradual tantrum” year of 2015.

“EM is swimming to safety,” Morgan Stanley summed up. “Though still in deep water.”

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