Emerging markets (EM) between lower global inflation and softer growth
- Emerging markets fixed income (EMFI) delivered positive total returns in Q4, reflecting lower inflation and heightened hopes of a more dovish global monetary policy stance.
- EM spreads and rates tightened substantially on cheap valuations and stability of global rates, while currencies (EMFX) rallied reflecting a weaker US dollar.
- EM asset performance during Q1 2023 should continue to be influenced by DM monetary policy, global inflation and growth dynamics.
Emerging markets fixed income showed positive total returns across all asset classes during the fourth quarter of 2022.
As we start 2023, we think there are reasons to believe this year could be better than 2022 for EM assets, albeit with some volatility particularly in H1. We are focusing on the following factors for our assessment:
- Inflation and growth dynamics in developed markets that should determine the path that monetary policy will follow in 2023.
- China’s financial and pandemic policies that would determine how supportive it could be for global growth and commodity prices in 2023.
- Geopolitical risks, including the Russia-Ukraine war and associated policies and sanctions (oil price caps among others).
- Enticing valuations in EM high yield credit, high yield rates and FX after the sell-off in 2022.
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