Emerging markets: a constructive 2022 in sight

THE year 2021 was a challenging one for emerging markets (EMs). Mixed vaccination progress across countries contributed to false starts in exiting the pandemic. Economic reopenings in EMs and reopening trades in their stock markets subsequently lagged those in developed markets (DMs).

China was a key concern - tighter fiscal and monetary policies, the "Common Prosperity" campaign driving regulatory changes across industries and a zero-Covid-19 approach combined to cool investor sentiment. Worries over US inflation and the direction of US monetary policy also came to the fore. Key EMs such as Brazil, Mexico, Russia and South Korea moved ahead of DMs in raising interest rates to curb price pressures.

Yet, there are several reasons to be constructive about EMs this year. For a start, equity valuations appear to have priced in much caution and indicate attractive long-term value. The fixed income perspective is also encouraging - real yields in EMs exceed those in DMs. In this regard, we are noticing shared optimism on EMs with our fixed income colleagues.