Can emerging markets rediscover their magic

The specter of higher interest rates in the US, slower growth in China and a stronger US dollar had a severe negative impact this year on emerging markets that were already reeling from the fallout from the coronavirus pandemic.

Indeed, investment managers whose job is to persuade clients to buy investment vehicles in emerging markets concede that 2022 won’t seem any easier.

“The obstacle to investors’ appetite for returning to emerging markets is much higher than it was,” said Paul Greer, director of emerging markets debt funds at Fidelity, referring to the tightening of US monetary policy and the impact of the pandemic on the public finances of emerging countries.

Other factors are the low rates of vaccination with “Covid-19” vaccines, and the difficulty of anticipating policies and political developments, as is the case in Turkey, whose currency collapsed this year, and in Latin America, which weakens confidence.

Tight regulatory measures imposed by the Chinese government have reduced the value of local shares by nearly $1 trillion, while the default by the property developer, Evergrande, in the largest event of its kind in China, caused the 30% drop in Chinese high-yield bonds.

Overall, emerging market stocks lost 7% of their value in 2021. This contrasts starkly with the rise of the Standard & Poor’s 500 Index, the MSCI global index’s 13% gain, and the boom year that each witnessed. Almost all other classes of investment assets are due to the cheap liquidity that fueled their gains.

Emerging market stocks are trading at the lowest prices, compared to stocks in developed countries for 17 years.

The fate of bonds in local currencies also worsened, as they fell 9.7%. As for dollar-denominated bonds, they were doing better thanks to higher oil prices, but they fell nearly 2% in 2021.

The JPY index fell. Morgan” for emerging market currencies, from which the Chinese yuan is excluded, 9.7%.

It was expected that the performance of investment tools in emerging markets would be fine thanks to the economy’s recovery from the pandemic, the improvement in commodity prices, and the investors’ pursuit of opportunities outside the markets of developed countries where prices seem high and returns are low.

Bank of America emerging markets strategist David Honer described 2021 as a “disaster,” and said, “Now it is impossible to find anyone who feels optimistic about emerging markets, a situation very contrasting with what it was a year ago, when you could not find One person feels pessimistic.”

The year 2021 came after a difficult decade for investment vehicles in emerging markets that are supposed to be high-risk, but at the same time high-return. In every year except for 2010 and 2017, the MSCI Emerging Markets Index has fallen below the main benchmark in the US market.

In front of other indicators, the performance was better. Since the end of 2016, the global MSCI index, excluding the United States, has risen by 34%, compared to the rise of the emerging market index by 40%. But this also means that shares in the developing world are not as cheap as they seem.

chinese cloud

Perhaps the “shared prosperity” plan that Beijing put forward in an effort to redistribute the spoils of economic growth, may indicate the end of the massive growth figures that made headlines in the past. At the macroeconomic level, Chinese growth is an important factor for emerging markets, and has for a long time been a lure for investors in this asset class.

In response, investment funds explored products that excluded China to convince their clients that the best opportunities lay in other markets.

However, confidence has been undermined by the Chinese mortgage debt crisis and tight regulatory measures, as well as fears of rising interest rates globally.

Marie Therese Barton, Head of Emerging Market Debt Management at Pict Asset Management, said: “Global allocators still treat emerging markets as a tactical trading tool, not a strategy. We hope that the wealth of the emerging market world will be appreciated, and this is difficult. At the moment, we are unable to perceive the picture.”

The problem is not the Chinese slowdown, says Bank of America’s Honer. “The picture is not great in any of the other emerging markets.”

Things were not all that bad, as investment portfolio flows held. Total flows to emerging markets this year amounted to $366 billion, and by the end of November, the share of fixed income investments exceeded 80%, according to data from the Institute of International Finance.

Emerging market stocks also enjoyed some inflows thanks to China and an outflow of funds from other markets.

better situation

Some say emerging markets today are in a better position to withstand higher US interest rates than they did during higher US Treasury yields, driven by Federal Reserve policy in 2013.

Luc Doug, Head of Emerging Fixed Income Instruments Division at Vontobel Asset Management, notes that the margins of high-yield emerging market bonds represent the highest difference in trading compared to developed world markets in 15 years. “These numbers reflect the situation of the crisis, and I do not think we are in a crisis,” he said.

Then there are those who argue that given all these negative factors, there can be no room for significant deterioration.

The chief global strategist at Morgan Stanley Investment Management, Rocher Sharma, said that the developing world represents 36% of the global economy, but it represents only 11 or 12% of the global market value of shares.

He added that this difference in valuation between US stocks and others has reached its highest level in 100 years, and is expected to shrink, and the money available to exit developing markets is less if panic strikes.

There are several factors that prevent investors from returning to emerging markets, including the low rates of vaccination with “Covid-19” vaccines, and the difficulty of anticipating policies and political developments, as is the case in Turkey, whose currency collapsed this year, and in Latin America, which weakens confidence.

Emerging market stocks lost 7% of their value in 2021. This contrasts starkly with the rise of the Standard & Poor’s 500 Index, the MSCI global index’s 13% gain, and with

The boom year witnessed by almost all other classes of investment assets due to the cheap liquidity that fueled their gains.

• The developing world represents 36% of the global economy, but it represents only 11 or 12% of the global stock market value.

• Those in charge of distributing shares of investment classes globally still treat emerging markets as a tactical rather than a strategic trading tool.

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