Emerging markets are well positioned to weather the US recession and may attract investors to them.
This is the message from money managers including JPMorgan Chase & Co. and Deutsche Bank AG, even as fears of deflation in the world’s largest economy led to a rush into Treasuries and other haven assets. Beyond short-term disruptions, they say, developing nations will be bolstered by cheap valuations, higher yields, faster growth and, above all, a rising China.
This appears to be difficult given the current scale of losses in emerging markets. Stocks and bonds suffered their biggest falls since the 1990s, while currencies suffered their worst losses ever, outstripping even the 2020 Covid defeat. Argentine assets are poised for further scrutiny. After the sudden resignation of Economy Minister Martin Guzman V. on Saturday.
So why should investors expect the developing world to show resilience when a recession occurs in the United States?
Historic defeat in emerging markets sows the seeds of outperformance.
“We may be close to peak pessimism,” said Oliver Harvey, who heads currency research for Central and Eastern Europe, the Middle East, Africa and Latin America at Deutsche Bank. “There are reasons to believe that emerging markets can perform better than in previous recessions, including very low foreign ownership of domestic assets, a relatively high starting point for interest rates, and cheap valuations.”
History shows that mere expectations of economic problems in the US lead to early selloffs in emerging markets and leave them undervalued when the downturn hits. For example, the US only got out of the so-called Great Recession in June 2009, but emerging market stocks and bonds plunged in October 2008, even before the Federal Reserve started quantitative easing.
This time around, sales in emerging markets began in the first quarter of 2021, a full year before they began in developed markets.
“Emerging market assets are relatively cheap by history and by comparison with their developed market peers,” Ninety One’s Grant Webster, Werner Gey van Pittius and Peter Kent wrote in an email. A hard recession, while not our primary condition, is not far from having a price.”
Of all the factors that investors say will reduce the impact of the US downturn, no one ranks higher than China. They are betting on a recovery in the world’s second-largest economy in the second half as the government gradually eases Covid restrictions and policymakers ease monetary tightening.
“If China continues to grow reasonably well, it may partially ease fears of a recession in the US or Europe,” said Claudia Kalish, head of emerging market debt at M&G Investments. “While there are still potential macroeconomic headwinds and some of the weaker countries may struggle, prices and valuations have already been adjusted very significantly and many of the negatives have already been priced in.”
Some doubt that China can play a huge role in shielding emerging economies from a US recession.
“China’s recovery from the Covid-zero-related shutdown will certainly be beneficial,” said Kamakshya Trivedi, co-head of global currency and interest rate research at Goldman Sachs Group AG. “I doubt it will fully protect emerging markets from negative effects, but it will mitigate the impact.”
While countries that depend on exports to the United States and Europe, as well as countries with weak external budgets and low real returns, will remain vulnerable, commodity exporters can be protected by demand from China, the largest buyer, Tai Hui said. Chief Asian Market Strategist at JP Morgan Asset Management.
Growth in developing economies will continue to outpace that of the United States, providing support for local currencies, according to Deutsche Bank. However, the picture is diverse. The bank said that while growth risks are rising in countries such as the Czech Republic and Chile, the outlook is strong in economies such as Poland and recovery continues in South Africa and Mexico.
Overall, economists polled by Bloomberg expect that the rate at which emerging markets are growing faster than developed markets will double to 2.5 percentage points in 2023. If the US has to go
“A large-scale recession in emerging markets is not our baseline, even if our colleagues expected it to happen in the United States,” Harvey said.