Wednesday, October 5

Winning bets for 2022 in emerging markets


Emerging markets will be one of the winning bets in investors’ portfolios by 2022, according to sources consulted by finance.com.

These economies are about to end their worst year since 2018, but their outlook will turn around in the second half of the year, as the outlook for economic growth recovers.

This is the diagnosis of Victor Alvargonzález, founding partner of Nextep Finance. “What has to happen next year is to maintain strong growth in the global economy so that emerging markets can join,” explained this expert to finance.com.

Emerging markets “could improve from the second half of the year, although they have to improve bottlenecks first,” he added. Alvargonzález. It is useless if raw materials go up if they are later stranded in ports.

Emerging markets, waiting for global growth to improve

This year’s narrative has been dominated by rising inflation and the impact of the coronavirus. The key to bad behavior is the pandemic. “It has been a problem and has kept emerging markets behind,” he said. Alvargonzález.

The machinery of these economies, highly dependent on raw materials, is different from that of Western economies, more focused on the service sector.

In this sense, “being able to telecommute is not the same as starting a copper mine, and it is one reason why we have not recommended them,” he added. Alvargonzález. This is the reason for the lower economic growth in the emerging world.

However, experts expect this situation to turn around. “2021 has been a year in which developed markets performed better than emerging markets, but the situation must be reversed,” he said. Tai Hui, chief strategist in Asia of JPMorgan AM.

For Hui, rising vaccination rates in some economies will offer a more favorable outlook, just as supply chain problems are beginning to normalize.

Attention to the aggressive turn of the Fed

So far this year, the index MSCI Emerging Markets loses more than 5 percent, compared to 27 percent who score the S&P500 or the 21 percent that is written down on Eurostoxx50. This stock market disparity reflects the different growth expectations.

The nuance that changes the variables in the equation is the Fed and the most aggressive turn it will take to its monetary policy. Investors expect three increases in the price of money in the US next year and assume that economic growth will peak.

As long as the Fed targets inflation and interest rates in the United States do not skyrocket too much, especially on short-term bonds, emerging markets could benefit.

“If rates do not rise too much, emerging markets could improve from the second half of the year,” he said. Alvargonzález.

Another factor likely to work in emerging markets’ favor is the greater easing of economic policies in China. The Communist Party is determined to curb the real estate excesses behind the Evergrande troubles.

“If the Fed embarks on a very aggressive tightening cycle or if China decides to keep its housing policies lax, emerging market assets would suffer more, but neither assumption is part of the central scenario,” he said. Jean Claude Sambor, strategist for BNP Paribas AM.

Avoid emerging country bonds

However, the key will be raw materials. “To the extent that they continue to rise, it is something that comes in handy for emerging markets,” he stressed. Alvargonzález.

Ultimately, it’s about markets like Chile, Brazil, Australia or South Africa benefit from the rise in the price of raw materials.

In this sense, the economists of Muzinich they believe that the demand for raw materials will continue to be high in a context of global growth above its potential level.

“It encourages us to have decent exposure to commodity producers in all of our portfolios, including those in emerging markets,” added these experts.

Of course, not all asset classes will work either. “Emerging country bonds are not a good idea, because if interest rates rise in the United States, the dollar also rises and investors lose due to the currency effect,” he said. Alvargonzález.

In the second half of the year, the emerging variable income part may become more attractive, confirmed the founding partner of Nextep Finance.



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