Analysis: In emerging markets, the bulls are back

Analysis: In emerging markets, the bulls are back

LONDON, Nov 23 (Reuters) – After some of the biggest losses ever in emerging markets this year, the bulls are back, betting the time is right for a rebound.

With warnings that global interest rates are stabilizing, China is easing COVID restrictions, and nuclear war is averted, investment banks’ annual forecasts for 2023 suddenly have quite high forecasts for emerging markets. (EM).

UBS, for example, expects emerging market equities (.MSCIEF) and fixed income to generate between 8% and 15% in total returns after falling 15% to 25% this year.

A “bullish” Morgan Stanley expects a return of almost 17% on local currency debt in emerging markets. Credit Suisse is “particularly” fond of hard currency debt, while BofA’s latest global survey of fund managers shows “emerging markets long” as the top “contrarian” trade.

“It’s kind of an overall downgrade in risk,” said T. Rowe Price, emerging markets portfolio manager Samy Muaddi, who has begun to dive back into what he describes as “well-established” emerging markets. 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 spike in interest rates, the war in Ukraine and China’s battle with COVID have combined to be a wrecking ball for emerging markets.

It could be the first time in the asset class’s three-decade history that ‘hard-currency’ EM debt – the type typically denominated in dollars – will cause investors to lose more than 20% on a total return basis. annual and the first ever 2-year series of losses.

The current 15% loss in local currency debt would be a record, as emerging market equities only saw worse years during the 2008 financial crisis, the 2000 dotcom bust and the the Asian debt explosion of 1998.

“This year has been very difficult,” said DoubleLine fund manager Bill Campbell. “If it wasn’t the worst, it’s one of the worst.”

Reuters Charts
Reuters Charts

It is the experience of these past routs that has led to the current wave of optimism.

The MSCI Emerging Markets stock index jumped 64% in 1999 and 75% in 2009 after falling 55% during the Asian and financial crashes. Emerging market hard currency debt also saw a huge 30% rebound after its 12% drop in the GFC and local debt, which had lost just over 5%, rose 22% and then 16%. % the next year.

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

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

Reuters Charts


Societe Generale analysts said on Tuesday that slowing inflation and impending recessions in developed markets were “extremely conducive to outperformance in local emerging market bonds.”

However, most major investment banks were arguing that emerging markets would rally around this time last year. No one predicted Russia’s invasion of Ukraine or soaring interest rates. There’s an almost annual ritual of bankers talking about the odds in emerging markets, say those who’ve followed emerging markets for years.

BofA’s December 2019 Investor Survey showed dollar “short selling” as the second most crowded trade. JPMorgan and Goldman Sachs were optimistic, while Morgan Stanley’s message at the time was: “Gotta Buy EM All!”.

The dollar then jumped nearly 7% and major emerging market equity and bond indices lost money.

“You know how it works with a broken clock – at some point it might be right,” said abrdn EM portfolio manager Viktor Szabo.

Annual movements in emerging market stocks


Besides the war in Ukraine, China’s stubbornly high inflation and lockdowns, rising debt and borrowing costs, credit rating agencies warn of rising default risks in countries such as Nigeria, Ghana, Kenya, Pakistan and Tunisia.

Nomura sees seven potential currency crises on the cards and while UBS is bullish on emerging market assets, it believes this year has seen the biggest depletion of foreign exchange reserves since 1997. Its global growth forecast of 2.1% would also be the slowest in 30 years, apart from the extreme shocks of 2009 and 2020.

“Our hope is that a looser Federal Reserve combines with a spike in the global inventory/recovery cycle in Asian tech from Q2 onwards, creating more fertile ground for emerging market outperformance at this time- there,” UBS said.

If the outlook does indeed improve, international investors are well positioned to return, having sold emerging markets heavily in recent years.

JPMorgan estimates that around $86 billion of emerging market bonds have been sold this year alone, quadruple the amount sold in the taper tantrum year of 2015.

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

COVID Emerging Markets Sovereign Ratings Deterioration

Additional reporting by Rodrigo Campos in New York; Editing by Elaine Hardcastle

Our standards: The Thomson Reuters Trust Principles.

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