What Emerging Markets Investors Should Be Aware Of In 2023

The following are the events, trends, and subjects that investors believe will influence the forecast for developing markets in the next year.

1/ LOW GROWTH, HIGH RATES

A slower pace of interest rate increases in the United States and other big countries might pave the way for an emerging market rebound in 2023, with a weaker currency and decreasing inflation offering much-needed respite.

Developing countries are anticipated to maintain their growth advantage over developed counterparts, but recession worries in the United States and Europe are casting a cloud over global markets in general, particularly in the first half of the year.

“The economic downturns, as well as the aggressive monetary tightening and geopolitical and commodities shocks that cause them, will be momentarily unpleasant in financial and developing markets,” said David Folkerts-Landau, Deutsche Bank's group chief economist.

Recovery may be slowed if developing central banks are unable to cut interest rates for the majority of the year.

Interest rates in emerging markets (https://www.reuters.com/graphics/GLOBAL-MARKETS/RATES/akpeqqrzrpr/EM18CEN22121.2.gif)

2/ REOPENING IN CHINA

The reopening of China after its COVID-19 lockdowns will be difficult, but with China accounting for roughly a fifth of global GDP, the potential of a strong rebound at a time of poor global development is appealing.

Analysts predict a strong increase in consumption and investment in the world's second-largest economy beginning in mid-2023.

“The savings rate in China right now is really high,” said Erik Zipf, head of developing market equities at DuPont Capital. “We believe that will be spent as soon as people feel safe going out, which will generate a significant economic tailwind.”

3/ UKRAINE'S WAR

Russia's invasion of Ukraine roiled markets and the global economy, and how the conflict plays out in 2023 may be just as crucial, whether it be a continuation, escalation, or progress toward a settlement.

Globally, the conflict has altered energy markets and inflationary pressures, food security, and perceptions of geopolitical danger — issues that are typically more acutely felt in developing countries. From refugee migrations to Russia's brain drain, emerging Europe has seen acute humanitarian consequences.

4/ REWORKS ON DEBT

Following COVID-19 and the conflict in Ukraine, an increasing number of nations are in financial distress: Zambia and Ethiopia are attempting to reduce debt loads through the Group of 20 Common Framework. Sri Lanka and Ghana declared bankruptcy in 2022.

However, a more complex mix of creditors, notably China's rise as the world's biggest bilateral lender, has slowed and complicated processes compared to earlier instances of the financial crisis.

“It's extremely difficult to have them all singing the same tune in the same key,” said Tim Samples, associate professor of Legal Studies at the Terry College of Business.

The number of nations barred from financial markets among smaller, riskier economies is at an all-time high - yet there may be a ray of hope.

“There isn't a lot of debt expiring next year,” said Carmen Altenkirch, an Aviva Investors developing markets sovereign analyst. “Pakistan is perhaps the nation most in danger.”

5/ BRAZIL BELOW LULA 2.0

President-elect Luiz Inacio Lula da Silva takes office on January 1st, and investors are already searching for signs of a fiscal anchor to restrict spending in Latin America's biggest economy.

Inflationary concerns have been emphasized by policymakers as a result of da Silva's 168 billion reais ($31.6 billion) expenditure plan to satisfy campaign pledges.

“Investors want to know whether Brazil's debt-to-GDP ratio is explosive or under pressure, if we'll approach 100% debt-to-GDP anytime soon or if we can stabilize it over the next two or three years,” said Gordian Kemen, Standard Chartered Bank's head of EM Sovereign Strategy (West).

6/ ELECTION IN TURKEY

As Turks walk to the polls in the most high-profile elections in emerging markets, President Tayyip Erdogan might face the largest political threat of his two decades in office.

The nation has been dealing with rising living expenses and a declining currency, with the lira recently sliding to a record low versus the dollar TRYTOM=D3. Following years of unconventional monetary policy, many investors have reduced their exposure to the country's assets. A change in leadership might result in a spectacular turnaround.

“In one way or another, this might be the most exciting story of 2023,” said David Hauner, head of EM Cross-Asset Strategy & Economics, EMEA, Bank of America Global Research.

7/ VOTE CASTING

Several other developing market nations are holding elections. Nigerians will vote for their new president in February, with incumbent Muhammadu Buhari unable to participate owing to term restrictions.

Argentina will conduct presidential elections in October in Latin America. Cristina Fernandez de Kirchner, Argentina's two-time president, and Vice President, stated she “would not be a candidate for anything” in the general election after an Argentine judge sentenced her to six years in prison in a high-profile corruption case.

In Poland, an election due in the fall might result in voters removing the country's incumbent nationalist Law and Justice party (PiS), reshaping Warsaw's contentious ties with Brussels.

($1 = 5.3109 reais)

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