Emerging markets are down, but not out

THE inflation genie is out of the bottle and poses a multi-layered challenge for policymakers. Rising energy, food and wage costs are combining to raise inflation expectations, which if left unchecked could destabilise the global economy.

Our base case for emerging markets (EMs) is built on the reality that they entered this current downturn in better health than prior cycles. Corporate leverage is lower, financial sector and other reforms have been implemented, and most policymakers are pursuing orthodox monetary and fiscal policies to address challenges. Nonetheless, we acknowledge the range and probability of alternative scenarios has increased.

Earnings recovery

In contrast to some other market observers expecting a contraction in EM earnings in 2023, at the start of this year we highlighted the likelihood of a recovery driven by India and China. China’s flexible policy response and India’s resilient gross domestic product outlook mean a recovery remains our base case.