EMERGING-MARKET assets are set to rise in 2022 as moderating inflation and accelerating growth trigger gains, but it won’t happen until the second half of the year.
That’s the consensus among investors like Goldman Sachs Group, Inc., Morgan Stanley and JPMorgan Chase & Co. who spoke with Bloomberg on the outlook for developing-nation stocks, bonds and currencies in the new year. As for specifics, they are looking for a Chinese equity rally and gains in local-currency bonds in countries such as Poland, Czech Republic and Hungary.
A midyear recovery would mark a turnaround for a sector that’s about to wrap up its worst year since 2018. While this year’s narrative has been dominated by rising consumer prices, disparate Covid-19 vaccine rollouts and gains in the US dollar driven by expectations of Federal Reserve tightening, better variables may come into play later in the year. Investors already see signs of recovery as policy makers get tough on inflation by boosting rates, while a peak in US growth may hand the advantage back to developing economies, they say.
“2021 has been a year when developed markets outperformed emerging markets in economic growth, and this needs to reverse,” said Tai Hui, chief Asia market strategist at JPMorgan Asset Management in Hong Kong.
Rising vaccination rates in some economies will offer a more favorable backdrop, just as signs emerge that supply-chain issues may be stabilizing, Mr. Hui says. Additionally, US policy rates could remain lower than headline inflation, intensifying the search for income.
That would be a welcome change in fortunes for investors in countries whose economies account for more than half of the world’s gross domestic product. The MSCI gauge of emerging-market stocks has dropped almost 5% this year, trading near the lowest level since 2001 relative to US stocks. Local-currency debt is on course for the worst year since 2015, while dollar bonds are heading for only their third loss since the global financial crisis of 2008.
Those disappointments underscore how growth rates among emerging nations have failed to keep pace with their richer counterparts. While developing economies were expanding an average of 2.5 percentage points faster than their developed peers before the pandemic, that’s narrowed to 1.3 percentage points this year, partly due to a shortfall of stimulus to counter the pandemic, investors say.
But with the Fed making a hawkish pivot and signaling three rate increases in 2022, US growth may peak. And that, coupled with a revival in economic activity in emerging markets, might help to widen the differential again.
At least 23 emerging and frontier nations have raised rates this year, which could have a moderating impact on inflation and boost real returns from emerging-market assets, especially stocks and local-currency bonds. At the same time, rising shipments from Asia suggest supply-chain bottlenecks may be easing, which also eases pressure on prices.
Another factor likely to work in favor of emerging markets is China’s policy-easing stance. Authorities in the country, which typically accounts for a third of all major developing-economy indexes by weight, are stepping up support for an economy under strain from a property market crackdown. In the latest move this month, Chinese banks lowered borrowing costs for the first time in 20 months. — Bloomberg