Key themes 2023 – Emerging markets look relatively resilient

In a tough global environment, we are below consensus on advanced economy growth and anticipate most will fall into recession in 2023. We expect that will push growth in emerging market economies well below trend, however we expect them to outperform AEs.

What you will learn:

1. EMs are displaying resilience. Ahead of the curve monetary policies – particularly in LatAm – have helped some EMs; elevated commodity prices will continue to support others; and some residual post-pandemic reopening impetus will remain in 2023, for example in tourism.
2. We are finally seeing some downside risks to inflation across emerging markets, as import price disinflation will be strong by mid-year. Upside risks to inflation persist given the context of recent relentless adverse surprises, but our model-based analysis suggests lower-than-consensus inflation outcomes in 2023.
3. We see a good year ahead for EM assets and this will hold up portfolio flows this year. Attractive valuations and receding uncertainty on inflation will offset downside risks to other categories of capital flows, the outlook for which could be weakened by global recession.
4. We anticipate no end to Russia’s war against Ukraine in H1 2023, with ongoing pain for the global economy as Russia’s trade shifts inefficiently away from Europe. But there are a few opportunities for the likes of Armenia, Georgia, and Turkey as brains and capital flees Russia.
5. EM sovereigns will continue to experience the most prolonged and painful wave of distress since the 1980s, as China and the IMF procrastinate over resolution policies. But few face funding cliffs next year, presenting opportunities for asset managers in this context. El Salvador and Angola are examples where we see value in harvesting high coupons despite the risks.