Emerging markets: A constructive 2022 in sight

Moneyweb

There are several reasons to be constructive about emerging markets (EMs) heading into 2022.

Equity valuations appear to have priced in much caution and indicate attractive long-term value.

China’s market valuations appear to be near a floor and should be well-supported from here following significant negative news over 2021. While near-term headwinds from regulatory uncertainty and its “zero-Covid-19” stance could extend into 2022, policymakers stand ready to stabilise economic growth if needed.

Across EMs, positive structural forces remain apparent and are likely to foster fresh investment opportunities. digitalisation and decarbonisation are key themes to watch.

Fiscal and current accounts are also in better shape than before, potentially ruling out a repeat of the severe market stresses that hit EMs in previous down cycles.

Measured optimism

2021 has been a challenging year for EMs. Mixed vaccination progress across countries contributed to false starts in exiting the pandemic. Economic reopenings in EMs and reopening trades in their stock markets subsequently lagged those in developed markets (DMs). China was a key concern — tighter fiscal and monetary policies, the “common prosperity” campaign driving regulatory changes across industries and a zero-Covid-19 approach combined to cool investor sentiment. Worries over US inflation and the direction of US monetary policy also came to the fore. Key EMs such as Brazil, Mexico, Russia and South Korea moved ahead of DMs in raising interest rates to curb price pressures.

Yet, there are several reasons to be constructive about EMs heading into 2022. For a start, equity valuations appear to have priced in much caution and indicate attractive long-term value. The fixed income perspective is also encouraging—real yields in EMs exceed those in DMs. In this regard, we are noticing shared optimism on EMs with our fixed income colleagues.

Fiscal and current accounts across EMs are also in better shape than before. Institutional reforms in major EMs over the past few decades have strengthened their economic discipline and resilience against crises. Strong commodity prices recently have been an additional windfall for resource exporters. Sturdier EM finances potentially rule out a repeat of the severe market stresses that hit EMs in previous down cycles.