Analysis-In emerging markets the bulls are back

By Marc Jones

LONDON – After some of the biggest losses on emerging markets this year, the bulls are back, betting that the time has come for a rebound.

With warnings that global interest rates are stabilising, China is relaxing COVID restrictions and nuclear war averted, investment bankers’ annual forecasts for 2023 suddenly have some pretty high forecasts for emerging markets (EMs).

UBS extensionfor example, he expects emerging market equities and fixed income to gain between 8% and 15% in total returns after declining 15% to 25% this year.

A “bullish” Morgan Stanley expects a yield close to 17% on emerging market local currency debt. Credit Suisse favors hard currency debt ‘particularly’, while BofA’s latest survey of global fund managers shows that ‘long EM’ is the top ‘contrarian’ trade.

“It’s kind of a total risk reduction,” said Samy Muaddi, EM portfolio manager at T. Rowe Price, who has started diving into what he describes as “well-anchored” EM countries like the Dominican Republic, Ivory Coast and Morocco.

“Now, I think the price is attractive enough to warrant a contrarian view.”

The interest rate hike this year, the war in Ukraine and the battle against China COVID they combined to be a wrecking ball for EM.

It may be the first time in the asset class’s 30-year history that “hard currency” emerging debt – the type usually denominated in dollars – will cause investors to lose more than 20% on an annual total return basis and the first two-year streak of losses .

The 15% loss currently accumulated by local currency debt would be a record, while emerging market equities had only worse years during the 2008 financial crisis, the 2000 dotcom explosion and the 1998 Asian debt explosion .

“This has been a very difficult year,” DoubleLine fund manager Bill Campbell said. “If it wasn’t the worst, it’s one of the worst.”

(Graph: Emerging Markets Debt Losses in “Hard Currency” –

(Graph: Losses on EM “local currency” debt –

It is the experience of those past defeats that has led to the current wave of optimism.

MSCI extensionThe EM stock index soared 64% in 1999 and 75% in 2009, after losing 55% during the Asian and financial market crash. Emerging market hard currency debt also saw a whopping 30% rebound after its 12% GFC extension decline and the local debt which had lost just over 5% rose to 22% and then to 16% the following year.

“There is a lot of value at today’s current levels,” DoubleLine’s Campbell added.

“We don’t think this is the time to blindly allocate into an emerging market, but you can start putting together a basket (of assets to buy) that makes a lot of sense.”

(Graphic: Sunken Markets –


Société Générale analysts said on Tuesday that cooling inflation and looming developed-market recessions were “hugely supportive of the outperformance of local emerging-market bonds.”

Most of the big investment banks, however, backed emerging markets to rally during this period last year. No one predicted a Russian invasion of Ukraine or soaring interest rates. There is an almost annual ritual of bankers talking about the possibilities of emerging markets, say those who have followed them for years.

BofA’s December 2019 investor survey showed dollar “shorting” was the second busiest exchange. JPMorgan and Goldman Sachs were bullish, while Morgan Stanley’s message at the time was: “Gotta Buy EM All!”.

The dollar subsequently rose nearly 7% and major emerging market stock and bond indexes lost money.

“You know how it works with a broken watch: at some point it might be right,” said Viktor Szabo, portfolio manager at abrdn EM.

(Chart: Emerging Market Equities Annual Movements –


In addition to the war in Ukraine, stubbornly high inflation and China’s lockdowns, rising debt and borrowing costs mean credit rating agencies are warning of rising risks of default in countries such as Nigeria, Ghana, Kenya, Pakistan and Tunisia.

Nomura sees seven potential currency crises on the cards and even ifs UBS extension is bullish on emerging market assets, he estimates this year has seen the biggest depletion of foreign exchange reserves since 1997. His forecast for global growth of 2.1% would also be the slowest in 30 years, barring shocks extremes of 2009 and 2020.

“Our hope is that a more dovish Federal Reserve combines with a peak in the cycle/recovery in global inventories in Asian tech since the second quarter, creating more fertile ground for emerging market outperformance at that time,” UBS extension She said.

If the outlook does indeed brighten, international investors are in a good position to pull back, having sold off emerging markets heavily in recent years.

JPMorgan estimates that about $86 billion of emerging market bonds have been dumped this year alone, four times the amount sold during the 2015 “taper tantrum” year.

“EM is swimming to safety,” summed up Morgan Stanley. “Though still in deep water.”

(Graphic: COVID Deteriorating Emerging Markets Sovereign Ratings –

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