- Equity Portfolio Manager
United Kingdom, Intermediary
Change
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
This is an excerpt from our 2023 Investment Outlook, in which specialists from across our investment platform share insights on the economic and market forces that we expect to influence portfolios in the year to come. This is a chapter in the Equity Market Outlook section.
At 632 days (since 17 February 2021), this is now the longest emerging markets (EM) equity bear market on record. Despite this, we believe liquidity and growth headwinds are likely to persist into next year. In this short article, we explore three key considerations for EM investors in today’s challenging environment and highlight potential winners and losers in 2023.
Tight global liquidity
Though we think the US Federal Reserve’s (Fed’s) near-term rate hikes are priced into the market, the terminal rate is likely not. The US cycle is indeed slowing but not enough for the Fed to pause hiking rates, and the US dollar is now at close to a 20-year peak relative to other G7 currencies. In Figure 1, we show EM equity’s historical performance (relative to global markets) as the dollar changes value. Our leading indicators suggest overall global liquidity conditions will likely continue to tighten for another six months, with two notable EM exceptions: China and Brazil. China has been loosening slowly since the beginning of the year, with negligible impact, while Brazil may start in the second quarter of 2023.
Figure 1
The impact of a developed market crisis
These liquidity conditions are important to note because today’s bear market is not an “EM crisis.” It is a developed market crisis that is impacting EMs. Notably, EM sovereigns are still in relatively healthy shape, especially compared to previous tightening cycles. However, liquidity drives markets and select EMs will be tested again as this environment persists. US rates are moving to unprecedented levels for this asset class (which started to become investable in the early 1990s) and more fragilities will likely surface in 2023 as a result.
Looking to the year ahead, we are closely monitoring the foreign exchange reserves of countries with net energy trade deficits, such as India, South Korea, and the Philippines. The more the US dollar appreciates, the more these countries’ central banks (and many others) may need to tighten and could face increasingly challenging trade-off decisions between inflation and growth.
Dispersion fuels winners and losers in 2023
But not all emerging markets are equally vulnerable to today’s environment. Brazil and Mexico, for example, with their ties to commodities and the US economy, respectively, could be near-term relative winners. We believe that inflation is well past its peak in these countries, that neither must govern through a Russia/Ukraine war spillover, and that both are largely removed from the specter of China’s influence.
Critically, when the US dollar and tighter liquidity conditions finally pivot, so, too, will emerging markets overall, in our view. But could China continue to lag after such an inflection point? We think so, but this will depend on the trajectory of its great-power geopolitical struggle with the US. The latest policies from Washington seeking to end China’s development of high-end chip manufacturing — combined with recent political developments in China — do not bode well for a potential truce next year.
Bottom line on emerging markets equity for the year ahead
Until that US-dollar pivot and the emergence of a more favorable environment for broader emerging markets, we believe investors should look to take advantage of the wide dispersion across EM countries next year. In our view, it will be critical to focus on the markets that can still thrive in a world with higher inflation, rising rates, and heightened tensions from deglobalization.
Expert
READ NEXT
Article 5
Stay up to date with the latest market insights and our point of view.
Related Insights
Showing
of
Insights Posts
Scaling opportunities in a new economic era
Explore our latest views on risks and opportunities across the global capital markets.
Article
2025-12-31
Monthly Asset Allocation Outlook
Wondering how to reposition your portfolio amid election-related uncertainty? Explore the latest monthly snapshot of our Multi-Asset Team’s asset class views.
4
min
Article
2025-12-31
Chart in Focus: The need to differentiate market growth from macro growth
Macro growth and earnings growth have been misaligned for the last 15 years, particularly in the US and China, but in opposite directions. For equity investors, what would be the key to identify real growth?
3
min
Article
2025-09-30
Time to capitalise on the evolving role of bonds?
We outline why we think the new economic era is elevating the role of bonds as a source of attractive and stable income, downside protection and portfolio diversification.
2
min
Article
2025-09-30
Impact investing in emerging markets: Growing opportunities, shifting challenges
Members of our impact bond team discuss their evolving emerging markets opportunity set and the importance of a bottom-up approach to value creation.
6
min
Article
2025-04-30
Emerging markets debt: resilience in the face of adversity
Our expert discusses why she is positive on the outlook for emerging markets debt, even though growth will likely slow.
Quick Take
2025-01-31
What route is right in emerging markets investing?
How can investors find the most compelling opportunities within emerging market equities? Simon Henry and Dáire Dunne explain why they think targeting the economic development opportunity may provide a roadmap for success.
Article
2024-12-31
Will a “Goldilocks” economy be just right for equity markets?
We provide an outlook on the ongoing shift to new investment regime, and the market segments that we expect will most heavily influence global equity performance in the coming year.
Article
2024-12-31
Beyond China: what does the rest of the EM equity world have to offer?
For investors contemplating a separate allocation to EM ex-China equities, members of our iStrat Team share their research on the composition of the opportunity set, the growing divergence in the behavior of EM ex-China equities and Chinese equities, and the long-term market outlook.
Article
2025-11-30
How would emerging markets weather a “standard” recession?
Macro Strategist Gillian Edgeworth explores the potential impact of a developed market recession on emerging markets.
Quick Take
2024-08-31
A quiet bull market in EM local debt?
Brian Garvey illustrates the recent strength of emerging markets local debt following an extended period of underperformance.
Quick Take
2024-06-30
URL References
Related Insights