Interview, Fireside Chat
Is it time to invest in emerging markets?
- Headline emerging market corporate earnings for 2023 are projected to experience a tepid low to mid-single-digit decline, though earnings quality is expected to be significantly better than in 2022.
- Structural growth sectors including consumer staples, consumer discretionary, financials, and healthcare are forecast to deliver very strong double-digit earnings growth in 2023, while semiconductor-heavy markets like Korea and Taiwan may face earnings declines in the first half due to inventory distortions.
- China's economy is anticipated to grow between 5% and 5.5% in 2023, driving mid-teens corporate earnings growth of approximately 14% alongside India's projected 16% to 18% growth, which is expected to compound at rates exceeding 15% over the next four to five years starting from 2021.
- Emerging market equities are expected to remain fairly valued with a one-year forward P/E of 11.5 times, a price-to-book of 1.6 times versus a 1.8 times long-term average, and a discount to U.S. equities of roughly 35% compared to the historical 25% to 30% range.
- Rising U.S. interest rates are anticipated to stabilize rather than increase further, driven by robust U.S. economic activity, while emerging market central banks are expected to have peaked in rate hikes during the second half of 2022 with modest increases in interest payments relative to GDP.
- Sovereign debt contexts are viewed as more favorable than the previous year, with resilient countries like Mexico and Indonesia identified as good value opportunities, whereas nations failing to tighten fiscal policy remain vulnerable to higher rates.
- Emerging market issuance is progressing rapidly, with approximately $50 billion issued in the first two months of 2023, representing nearly half of the annual requirement, while debt restructuring negotiations may be delayed by bilateral arrangements that negatively impact recovery rates.
- Risks include ongoing inventory cycles in the semiconductor sector and the possibility that investors view China's economic reopening as only a marginal positive factor rather than a primary return driver.
- Specific country dynamics note that while India is expected to benefit from increased global demand and offer real diversification due to lower correlation with global growth, its equity valuations may appear expensive relative to long-term averages in the near term.
- Global liquidity conditions are not expected to change dramatically despite monetary policy shifts, and emerging market corporate debt is forecast to remain resilient due to cost-reduction capabilities and restructuring options.