Tommy Wilkes and Karin Strohecker

LONDON, (Reuters) – Rising interest rates in America and slowing Chinese growth have this year hammered emerging market economies already suffering from the effects of the coronavirus pandemic.

Money managers who have to persuade clients to invest in emerging assets acknowledge that 2022 is not an easy task.

Paul Greer, Fidelity’s manager of emerging debt funds, stated that the hurdle investors must overcome to flood back into emerging market is much higher than before. This was due to tighter U.S. Monetary Policy and the devastating effects on public finances in developing countries.

There are also low COVID-19 vaccine rates, unpredictability in policies and politics in countries like Turkey (whose currency collapsed this year) and Latin America which further undermine confidence.

Chinese regulators clampdowns have helped erase $1 trillion of local stocks. However, Evergrande the biggest debt defaulter in China was behind a slump in Chinese high-yield bond yields by 30%.

Emerging market equity stocks have experienced a 7% decline in total since 2021. This is in stark contrast to the 22% increase, MSCI World’s 13% gains, and the record year almost for every asset class, as well as the cheap cash turbocharged rallies.

In 17 years, emerging stocks have traded at a deep discount to developed equities. (Graphic: EM vs DM MSCI indexes, https://fingfx.thomsonreuters.com/gfx/mkt/zgvomngwzvd/em%20indexes.PNG)

Also, local currency bonds suffered a 9.7% loss. The soaring oil price and the decline in dollar yields meant that dollars-denominated bond performed well, but they are expected to fall by 2% by 2021. JPMorgan (NYSE 🙂 has lost 9.7% in its Emerging Markets Currency Index. This index excludes.

As economies recover from the pandemic and commodity prices recovered, emerging assets were expected to do well. Investors sought out opportunities in markets that weren’t as expensive or low yielding.

“Now it’s difficult to find someone who is bullish in emerging markets. That is a sharp contrast to a past year when you couldn’t find one bearish person.” David Hauner (a BofA senior EM Cross-asset strategist) called 2021 a “disaster”.

After a difficult decade, 2021 will be a turbulent year for emerging assets. These investments are high-risk but low-reward. Except for 2010 and 2017, MSCI has seen its EM index fall behind that of the U.S. benchmark.

Performance is superior to other indexes. Performance is better than others since 2016. The MSCI World ex. U.S. has increased 34% over 2016, which is less than the emerging index’s 44% gain. This also indicates that emerging equities are not as inexpensive as they seem.

CHINESE CLOUD

China looms large.

The ‘Common Prosperity” plan in Beijing, designed to distribute the benefits of economic growth may end the headline-grabbing numbers. China’s growth is important for emerging markets, and investors have long been attracted to the asset class.

To convince their clients, the funds are promoting products outside of China.

However, China’s debt crisis in property and regulations as well as worries about global rising rates have all impacted confidence.

Mary-Therese Barrton from Pictet Asset Management, head of emerging debt said that “asset allocators around the world still view EM as a tactical and not a strategic trade.” We hope that the richness and diversity of the EM universe is appreciated. At the moment we don’t have the ability to discern the difference between the wood and the trees.

BofA’s Hauner claimed that China’s slowdown was the main problem, and “none other EMs really has a great tale at this time.” (Graphic: Global FX in 2021, https://fingfx.thomsonreuters.com/gfx/mkt/znvnexrnzpl/Pasted%20image%201640096961775.png)

Portfolio flows are holding steady, which is not necessarily a bad thing.

By November’s end, total 2021 emerging market flows had reached $366 trillion, which is greater than 80% of the fixed-income investors, according to data from Institute of International Finance. China drove inflows to emerging equity, while outflows were from elsewhere.

BEST PLACES

Some argue that emerging markets today are more able to weather rising U.S. interest rates than during the Fed’s 2013 ‘taper tantrum.

Spreads on emerging high-yield bonds are trading at the largest gap relative to developed market spreads for fifteen years, according to Luc D’hooge (Vontobel Asset Management’s head, emerging markets fixed income),

These numbers are indicative of a crisis and I don’t believe that we are in one,” he stated, adding that emerging debt profiles as well as terms and conditions for trade were much better.

You can also argue that there is no worse news than the bad ones.

Ruchir Sharma estimates that the emerging world makes up 36% to global economic growth, and only 11-12% of global stock market capitalization. Morgan Stanley The chief global strategist of Investment Management.

He said that the valuation gap between U.S. stocks & everyone else has reached 100-year heights, and it should shrink.

In the event of panic, you have less money left to pull cash out of developing market markets.

Sharma stated that “the popular response to this is another taper with the head emerging markets. But these dynamics change where there’s risk, and where there is excess capacity.” According to Sharma, the current overcrowding in America is found in tech stocks with megacaps in the United States and not in emerging market countries.