Emerging market assets set to rise in 2022

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

Emerging market assets are set to rise in 2022 as moderating inflation and accelerating growth trigger gains, but that 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 mid-year 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 U.S. 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 U.S. 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 favourable backdrop, just as signs emerge that supply-chain issues may be stabilizing, Hui says. Additionally, U.S. 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 (GDP). The MSCI gauge of emerging-market stocks has fallen more than 5% this year, trading near the lowest level since 2001 relative to U.S. 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 signalling three rate hikes in 2022, U.S. growth may peak. And that, coupled with a revival in economic activity in emerging markets, might help to widen the differential again.