Analysis: In emerging markets, the bulls are back


LONDON: After some of the biggest emerging market losses recorded this year, the bulls are back and betting it’s time for a recovery.

With global interest rates stabilizing, China easing COVID restrictions and nuclear war averted, investment banks’ annual forecasts for 2023 suddenly include some pretty lofty emerging market (EM) forecasts.

For example, UBS expects emerging market equities and fixed income to return between 8 and 15 percent in total returns, after falling 15 percent and 25 percent this year.

A “bullish” Morgan Stanley expects a return of nearly 17 percent on emerging market local currency debt. Credit Suisse “prefers” hard currency debt, while BofA’s latest global fund manager survey shows that “long EM” is the top contrarian trade.

“It’s kind of a large-scale risk mitigation,” said T. Rowe Price EM portfolio manager Samy Muaddi, who has begun to dip his toe back into what he describes as “well-entrenched” EM countries like the Dominican Republic, Ivory Coast. Coast and Morocco.

“Now I find the price attractive enough to warrant a contrarian view”.

This year’s rise in interest rates, the war in Ukraine and China’s fight against COVID combined to be a wrecking ball for emerging markets.

It could be the first time in the asset class’s three-decade history that emerging-market hard currency debt — the kind usually denominated in dollars — will lose investors more than 20 percent year-on-year and mark its first-ever 2-year run. of losses.

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The 15 percent loss currently incurred on local currency debt would be a record, while emerging market equities have seen only worse years during the 2008 financial crisis, the 2000 dotcom boom and the Asian debt explosion in 1998.

“This has been a really tough year,” said Bill Campbell, DoubleLine fund manager. “If it hasn’t been the worst, it’s one of the worst.”

(Image: EM “hard currency” debt losses –

(Image: “local currency” EM debt losses –

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

MSCI’s EM stock index rose 64 percent in 1999 and 75 percent in 2009, after losing 55 percent during the crash of both the Asian and financial markets. Emerging market hard currency debt also rebounded by as much as 30 percent following the 12 percent drop in gross profit and local debt, which had lost just over 5 percent, rose to 22 percent and then to 16 percent the year after.

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

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

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(Image: sunken markets –


Analysts at Société Générale said on Tuesday that cooling inflation and the looming recession in developed markets were “extremely supportive of the outperformance of local bonds in emerging markets”.

However, most major investment banks supported emerging markets to recover around this time last year. No one predicted the Russian invasion of Ukraine or rising interest rates. There is an almost annual ritual of bankers discussing emerging market opportunities, say those who have followed EM for years.

BofA’s December 2019 investor survey showed that shorting the dollar was the second busiest trade. JPMorgan and Goldman Sachs were optimistic, while Morgan Stanley’s message at the time was “Gotta Buy EM All!”.

The dollar then rose by almost 7 percent and the major EM stock and bond indices lost money.

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

(Image: Annual Movements in Emerging Market Equities –


In addition to the war in Ukraine, stubbornly high inflation and Chinese lockdowns, rising debt and borrowing costs are leading credit rating agencies to warn of rising default risks in countries such as Nigeria, Ghana, Kenya, Pakistan and Tunisia.

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Nomura sees seven potential currency crises looming and while UBS is bullish on EM assets, it estimates that this year has seen the biggest depletion of currency reserves since 1997. The forecast of 2.1 percent global growth would also be the slowest in 30 years from the extreme shocks of 2009 and 2020.

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

If the outlook does indeed improve, international investors are well placed to re-enter, having sold heavily to emerging markets in recent years.

JPMorgan estimates that some $86 billion of emerging market debt has been dumped this year alone, quadrupling the amount sold during the taper tantrum year of 2015.

“EM swims to safety,” summarized Morgan Stanley. “Although still in deep water”.

(Image: COVID deterioration in emerging market sovereign ratings –

(Additional reporting by Rodrigo Campos in New York; editing by Elaine Hardcastle)


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