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2022 Investment Views: Emerging market outlook

Buffers built to counter global challenges?

Challenges remain as we enter 2022, but prudent action already taken by central banks has left emerging markets well-prepared heading into the new year. Grant Webster and Archie Hart discuss further.

24 Nov 2021

10 minutes

Grant Webster
Archie Hart
Challenges remain as we enter 2022, but prudent action already taken by central banks has left emerging markets well-prepared heading into the new year. Grant Webster and Archie Hart discuss further.

The fast view

  • Emerging market (EM) economies have emerged from the pandemic in a far healthier condition than was initially feared.
  • EM central banks have acted prudently – and far more quickly than their developed market peers – lifting rates to levels more appropriate for the inflationary conditions. Spreads are at historically wide levels heading into 2022.
  • This building of buffers and resilience should help them weather two major challenges: tightening global liquidity in conjunction with slowing growth, and the weakening growth outlook in China.
  • By the second half of 2022 we will likely be feeling the strong base effects of the sharp rise in inflation seen in 2021.
  • We believe there should be opportunities in EM dollar debt, particularly high-yield countries. In equities, aligning portfolios with government priorities is a prudent approach; the key, as always, is to remain selective.

Chapters

01
A stronger year than feared
02
The inflation shock
03
Buffers in place
04
Where does this leave the outlook for 2022?
05
Waning bottlenecks?
06
Ongoing appetite
01

A stronger year than feared

The pandemic was less damaging to EM economies than previously thought.

As we headed towards the end of 2020, emerging market (EM) economies were braced for a difficult period ahead. Economists expected EMs to run significant output gaps as they bore the brunt of the COVID-19 devastation, which wrought havoc across supply chains and left many countries running at well below capacity. The anticipated recovery was expected to take years, with fiscal spending constrained by elevated deficits and the uneven roll out of vaccine programmes disproportionately impacting developing countries, making them vulnerable to further waves of the virus.

However, for all this doom and gloom, a healthier reality emerged as EM economies fared much better than expected. As Figure 1 illustrates, revisions to growth forecasts revealed that the pandemic was less damaging to EM economies in 2020 than previously thought, while growth in 2021 has been stronger than expected. Strong demand from developed markets (DMs) for both goods and commodities has meant that EMs have experienced a robust terms-of-trade improvement, leading to healthier current accounts, while fiscal revenues have also been stronger than expected, which has given governments (and markets) much-needed breathing room. Meanwhile, the allocation of special drawing rights from the IMF has substantially alleviated the funding requirements for many smaller, frontier markets.

Figure 1: EMs have emerged in a far healthier condition than was initially feared

Figure 1: EMs have emerged in a far healthier condition than was initially feared

Source: IMF World Economic Outlook (October 2020 and October 2021), Ninety One calculations.

Authored by

Grant Webster
Portfolio Manager
Archie Hart
Portfolio Manager, Emerging Markets Equity

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