Emerging Markets: Poised for Stronger Performance in 2023

Emerging markets (EM) have shown resilience despite a confluence of unprecedented shocks, and appear to be positioned for stronger performance in 2023.[0] The MSCI Emerging Markets Index is up 6.7% so far this year, versus 7.7% for the developed market MSCI World Index.[1] In 2022, this showed roughly a 3 percent drop in performance.[1]

Cracks are appearing in Wall Street’s bullish case for emerging markets as hurdles—from Adani Group’s US$108 billion rout to the United States Federal Reserve’s rate-hiking plans—prompt a more selective approach to investment.[2] Our quantitative (quant) signals remain strongly positive for EM stocks, with positive valuation and currency scores now supplemented by positive momentum.[3] Despite EM’s subsequent outperformance of 12.5% since October 31, 2022, through January 31, 2023, we still feel that an underweight to risk assets makes sense for multi-asset investors.[4]

We expect emerging markets to be early beneficiaries of the inflection points in global markets, earnings, and GDP growth we expect in 2023, and are most preferred on both emerging market stocks and bonds.[5] China is our most preferred market and we expect its growth to accelerate in 2023, supported by the recent changes in COVID-19 policies.[6]

In the past, when financial conditions were more relaxed and the US dollar was weaker, emerging markets tended to perform well.[5] The DXY dollar index is predicted to continue weakening, with it still being 9.5% lower than its high point in September, even with a limited recovery recently.[7] It is anticipated that the worldwide economy will hit its lowest point this year, and then start to get better.[7]

The beginning of 2023 saw a rally in developing-economy assets due to China’s reopening and the anticipation of less stringent global financing conditions; however, this momentum is beginning to diminish.[8] As new risks arise, Goldman Sachs Asset Management and JPMorgan Chase & Co. are among those touting more selective strategies.[8] M[8]’s index for developing currencies on Monday headed for its biggest two-day decline since March 2020, after data showed a hot US labor market that bolstered the Fed’s case to keep raising rates.[8]

In conclusion, while global growth may still be dampened, China’s reopening marks a notable turning point.[9]

0. “The Worst Is Likely Behind for Emerging Markets” Forex Factory, 14 Feb. 2023, https://www.forexfactory.com/news/1205449-the-worst-is-likely-behind-for-emerging-markets

1. “Stars are aligning for emerging markets in risky environment” UBS, 9 Feb. 2023, https://www.ubs.com/us/en/wealth-management/insights/market-news/article.1584768.html

2. “The year’s emerging-market rally is already in danger of slowing” Financial Post, 5 Feb. 2023, https://financialpost.com/pmn/business-pmn/the-years-emerging-market-rally-is-already-in-danger-of-slowing

3. “Reading the Signals: EM Equities Still Highlighted in Multi-Asset Strategies” AllianceBernstein, 7 Feb. 2023, https://www.alliancebernstein.com/corporate/en/insights/investment-insights/reading-the-signals-em-equities-still-highlighted-in-multi-asset-strategies.html

4. “Reading The Signals: EM Equities Still Highlighted In Multi-Asset Strategies” Seeking Alpha, 8 Feb. 2023, https://seekingalpha.com/article/4576224-reading-the-signals-em-equities-still-highlighted-in-multi-asset-strategies

5. “Stars are aligning for emerging markets – UBS” FXStreet, 10 Feb. 2023, https://www.fxstreet.com/news/stars-are-aligning-for-emerging-markets-ubs-202302101526

6. “Outlook 2023: Explore the catalysts for a recovery in emerging market equities” The Financial Express, 8 Feb. 2023, https://www.financialexpress.com/investing-abroad/featured-stories/outlook-2023-explore-the-catalysts-for-a-recovery-in-emerging-market-equities/2974429

7. “Stars are aligning for emerging markets in risky environment” UBS, 9 Feb. 2023, https://www.ubs.com/global/en/wealth-management/our-approach/marketnews/article.1584768.html

8. “The Year’s Emerging-Market Rally Is Already in Danger of Slowing” Yahoo! Voices, 6 Feb. 2023, https://www.yahoo.com/now/emerging-market-rally-already-danger-130147710.html

9. “Taking Note Of Emerging Market Opportunities” Seeking Alpha, 9 Feb. 2023, https://seekingalpha.com/article/4576681-taking-note-of-emerging-market-opportunities