This year has been a magical year for the global capital market and various types of assets. Some asset classes in emerging markets have experienced the largest declines on record. However, with the change of old and new, the bulls are back, betting that the time has come for emerging markets to rebound, and may even overtake developed economies in 2023. With global interest rates stabilizing, China relaxing the prevention and control of the new crown epidemic, and the situation in Ukraine has not escalated, the 2023 annual forecasts of a number of Wall Street investment banks have made quite optimistic forecasts for emerging markets.
However, optimistic forecasts are optimistic. In the same period last year, Wall Street investment banks also gave emerging markets positive expectations. Some analysts also warned that some risks facing emerging markets will continue into 2023.
Investment banks are betting that emerging markets will rebound next year or even overtake
This year, global interest rates have soared simultaneously, Ukraine’s stalemate and China’s epidemic have repeatedly hit emerging markets: “hard currency” emerging markets bonds (usually denominated in US dollars denominated) would cost investors more than 20%, not only the worst annual performance in the asset class's 30-year history, but also the first two consecutive years of losses. Misfortunes never come singly, local currency bonds in emerging markets also recorded a record 15% decline, and the Morgan Stanley Capital International Emerging Markets Stock Index (MSCI EM), which tracks the performance of large-cap stocks in 24 emerging economies, performed better this year than in 2008. Crisis, the dot-com bubble burst in 2000 and the Asian financial crisis in 1998 were even worse.
"It's been a very tough year," said Bill Campbell, fund manager at DoubleLine. One of the worst.”
However, it is this extreme trend that has led to the current “wave of optimism” in the market. According to the latest survey of global fund managers by Bank of America , "bullish emerging markets" has become the most important "reverse" transaction at the moment.
This expectation is not unfounded. Historically, the MSCI emerging market stock index fell 55% during the Asian financial crisis in 1998 and the global financial crisis in 2008, followed by a sharp rebound of 64% in 1999 and a 75% surge in 2009. Similarly, after a 12% decline in emerging market hard currency debt in 2008, there was an astonishing 30% rebound in 2009. After a slight decline of more than 5% in 2008, local currency debt recorded a consecutive 22% and 20% in the following two years. High annual rate of return of 16%.
Learning history as a mirror, all investment banks expect that emerging market assets will repeat the history of rebound in 2023. UBS expects emerging market stocks and bonds to post a total return of between 8% and 15% next year after plunging 15% to 25% this year.
Morgan Stanley, the "bull" in emerging markets, also said that in an environment of slow growth, lower inflation and new monetary policy in 2023, he expects bonds, defensive stocks and emerging market assets to rise.
"Emerging market stocks and bonds have underperformed this economic cycle, but may recover early in the next economic cycle , as they did after the dot-com bust in 2000 and the financial crisis in 2008." "The tide may be turning for a bear market in emerging markets," said Jonathan Garner, chief equity strategist for Asia and emerging markets at Morgan Stanley. Fed stoprate hikes, dollar down, cyclical trends are shifting in favor of emerging markets. Emerging markets have recovered faster than U.S. markets over the past few economic cycles."
Specifically, Morgan Stanley Lee predicts that the MSCI emerging market stock index may return 12% in 2023. Emerging market bonds may also benefit from various trends such as lower interest rates, improving economic fundamentals and a weaker dollar. The total return in 2023 is expected to be 14.1%. , the total return on emerging market local currency bonds is expected to be even higher at 18.3%.
“Emerging markets willThere is a large-scale de-risking trend. "I think emerging market assets are attractive enough at current prices to make people think that next year's trend will be the opposite of this year's," said Samy Muadid, emerging market portfolio manager at T. Rowe Price. expected. "He has recently restarted the layout of some emerging economies that he considers "stable", such as Dominican Republic , Côte d'Ivoire and Morocco assets. Reversing the general trend of this year’s lagging behind developed economies. In its "2023 Emerging Market Outlook" report, the bank predicts that emerging markets will achieve solid growth next year, with an overall economic growth rate of 3.8%, while the overall economic growth rate of developed markets will be only 1.2%.
"In 2023, emerging markets are likely to maintain modest expansion, while developed markets will slow down significantly. "Phoenix Kalen, director of emerging market strategy at Societe Generale , explained that there are two reasons for the overall overtaking of emerging markets. First, inflation in emerging markets seems to have reached its peak, which will make central banks end The interest rate hike cycle , "As interest rate hikes stop, growth headwinds may ease." The second is the post-epidemic recovery of developed economies and emerging economies. This year, emerging economies still need time to gain a foothold, But factories in developed countries quickly came back to life.However, a series of monthly data released as 2022 draws to a close shows that manufacturing activity in developed countries is falling sharply, while manufacturing in emerging markets is plateauing and approaching the end of 2022. Expansion points to .
"The U.S. looks set to enter a recession in 2023 or 2024, although the recession may be short. In any case, the recession may end up weakening the dollar's strength in 2022, and emerging economies' currencies will reverse in 2023, especially those in emerging Asia. Cooling EM inflation and an impending DM recession will also be "extremely positive for EM local currency bonds," he added.
Watching the time on a broken clock?
While investment banks are bullish on EM, However, most large investment banks also predicted that emerging markets would rebound soon at the end of last year. Few analysts predicted that the global central bank would raise interest rates simultaneously this year, and no analyst predicted that the situation in Ukraine would occur in early 2022 Upgrade. Some investors who have been paying attention to emerging markets for a long time said that investment banks will talk about investment opportunities in emerging markets for the next year almost at the end of each year.
A Bank of America investor survey in December 2019 showed that shorting US dollars was the second largest at that time Hot trades. JPMorgan and Goldman Sachs were both bullish on emerging markets at the time, and Morgan Stanley's message at the time was: "Must buy big on emerging market assets! "But then, the dollar soared nearly 7%, and the major emerging market stocks and bond index both recorded losses.
Viktor Szabo, emerging market portfolio manager of Aberdeen Investments, joked: "Forecasting is like using a bad mouthful. Watching the time on an old clock - at some point, the conclusion may be correct. "
Some investment banks still maintain a cautious attitude towards emerging markets. Nomura warned that seven emerging economies, including Egypt, Romania, Sri Lanka, Turkey, the Czech Republic, Pakistan, and Hungary, are facing high risks. Currency crisis risk.
Nomura said that of the 32 countries covered by its internal warning system, risk has risen in 22 countries since the last data update in May, with the Czech Republic and Brazil seeing the largest increases, with 32 countries The sum of the ratings has also increased sharply from 1744 points since May to 2234 points. Nomura economists said that this is the highest total score since July 1999, which is close to the peak of 2692 points during the Asian financial crisis and is a warning Signals that risks to emerging market currencies are increasingly broad.
Although UBS is bullish on emerging market assets, the bank still estimates that overall foreign exchange reserves in emerging markets will suffer the largest contraction since 1997 this year. UBS analyst team "Our hope is that the Fed's slowdown in rate hikes will be consistent with the second quarter global inventory cycle/The combination of the peak of the recovery creates more fertile ground for the performance of emerging market assets. Some $86 billion in emerging market debt has been sold this year, according to JPMorgan estimates, four times the size of the sell-off during the "taper tantrum" of 2015. So, after a sharp sell-off, if the outlook improves, global investors will A renewed influx into EM bonds is likely.
But overall, in JPMorgan's 2023 Outlook, a decline in private sector savings will test EM's ability to withstand a continued tightening of global financial conditions and weaker global growth.2022 The geopolitical pressures of 2023 remain unresolved, a two-sided risk for emerging markets in 2023. And some key domestic political events will also be closely watched – most notably elections in Turkey and Argentina .
The report also said that inflation is expected to remain an issue for about half of EM core central banks. Some EM central banks (Latin America , India, Czech Republic) may start monetary easing next year, but most appear to be Will keep high interest rates for a longer period of time, especially in emerging Asia, which lags behind other emerging markets in the pace of interest rate hikes, and is expected to maintain monetary tightening next year. In addition, in 2023, the global and US economic cycles will still be the focus of emerging market assets Key drivers. Historically, the worst moves in EM risk assets have typically been US recessions , accompanied by a sharp widening of credit spreads. EMs have historically followed these patterns, although in 2022 EM A sell-off in assets may ease the trend, but the risk premium of a U.S. recession will be higher in 2023. A common theme for emerging market bonds this year is a stronger U.S. dollar and U.S. funding rates, according to a Barclays research note EM bonds should face similar challenges in 2023, as some EM currencies are already very weak. In addition, lower dollar reserves, less room to offset imported dollar inflation, and limited fiscal room for maneuver may also pose risks to emerging market bonds.
But the bank also believes that 2023 may be a turning point. If U.S. policy Interest rates peak and the market begins to price in lower interest rates in 2024 or 2025, and emerging market bonds may make a comeback. The specific entry point may be synchronized with higher spreads, because higher spreads open up arbitrage opportunities. At the same time , The average yield of emerging market bonds in the past 20 years has exceeded 6%~7%, which should also be able to guarantee its subsequent stable performance.
"Emerging markets are swimming to safety, although they are still in deep water. ”Morgan Stanley concluded.
