While 2022 was a challenging year for Emerging Markets, amid the Fed’s aggressive response to high inflation, we are more constructive for 2023 across four main themes:
- The reopening in China. This is becoming a major catalyst for EM in 2023. The economic recovery after reopening is well on track, so much so that we have revised up our growth expectations for 2023 to 6%.
- The second supportive point is linked to the first as China’s earlier-than-expected reopening and a downturn in US economy should contribute to a widening EM-DM growth differential playing in favour of the former.
- The global scenario is complex due to the stickiness of inflation. However, recent tightening of financial conditions following the banking turmoil could reduce the need for aggressive Fed rate rises. As the end of the US tightening cycle looms, we expect the dollar to be stable / weaken in the second half of 2023.
- After significant monetary policy tightening in many EM countries over the past two years, they are in an advanced stage compared to DM. The tightening in EM may be behind us in the vast majority of cases, but the EM landscape is very diverse.
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