MUFG: Emerging Markets H2 Outlook

MUFG: Emerging Markets H2 Outlook

Opkomende markten Vooruitzichten
Emerging Markets (02) EM Opkomende landen Azië

Emerging markets are caught in the middle of a perfect storm. Indebted governments have spent capital they didn’t have to shore up rickety healthcare systems against the pandemic and provide a safety net for citizens. Then, the war in Ukraine turbocharged commodities that powers the real economy from hydrocarbons to carbohydrates, with central banks raising borrowing costs to quell inflation.

To make matters worse, the Fed’s twin tightening – higher cost of funding and withdrawal of liquidity – alongside a lower gear in China, is biting, inhibiting capital flows with many investors retrenching from assets in emerging markets. Soaring living costs have triggered bouts of social and political instability and the probabilities are rising of a wave of bond defaults with nearly a quarter of emerging markets now trading at distressed levels.

Contagion from smaller emerging markets will be limited in H2 2022 as more systemically important major countries are well insulated by healthier balance sheets, sizable reserve buffers and less overvalued currencies, though in a cascade of credit events, the negative impact of the whole could be larger than the sum of the parts.

Strategic opportunities across the emerging markets complex for the remainder of this year will be seldom in scope and in the form of tactical bonuses, supported by a favourable technical picture, i.e. depressed sentiment, low positioning and high cash levels of institutional investors. Whilst emerging markets are never one unified market, what is clear is that the headwinds facing the complex are strong, making it a difficult investment proposition until we see the Fed pivoting, global supply-disruptions improving and the Chinese economy rebounding.

At the start of 2022, stagflation seemed like a big enough concern. Now emerging markets are having to deal with the risk of an outright global recession.

We provide comprehensive insights into current state of affairs miring the emerging markets complex, in a new presentation called: Recession risks across emerging markets: Demystifying debt, distress and defaults.