If you think U.S. stocks are having a tough year, think of the emerging world, where the MSCI Emerging Markets index benchmark has lost 40% of its peak in 2021. 1 Can the massacre be contained?
The answer depends on a number of complicated geopolitical issues in addition to traditional metrics, such as corporate profits. Can China, which accounts for about a third of some emerging indexes, recover from pandemic restrictions and get growth back on track? Will the U.S. dollar continue to rise, increasing the cost of imports in a commodity-dependent economy? Will peace break out in Ukraine, putting Russia on the road to once again participate in world trade?
First, some promising data: Startups have a debt-to-equity ratio of just 1.5 times revenue, well below their developed market peers. The MSCI EM index is trading about 10 times its forecast for future earnings, compared to 17 times for the S&P 500. 1 In addition, a stronger dollar will help commodity exporters, which are usually priced in dollars. 2 Read on for more thumbnails from major emerging markets.
“Valuations remain attractive in the face of history and developed markets,” Lazard Asset Management wrote in a note to investors in October. “Profitability, free cash flow and dividend yields have increased, and revenue growth is expected to recover in 2023.” Arabic numerals
- Some analysts see attractively value emerging markets recovering in 2023 after a difficult year filled with geopolitical and economic uncertainty.
- The Organization for Economic Cooperation and Development (OECD) projects that growth in China will accelerate as the government moderates COVID policies and adopts supportive fiscal policies.
- Growth is expected to slow in India, but it is still on track to become the second fastest growing economy in the G20.
- Brazil and South Africa are expected to feel the pain of stabilizing commodity prices.
- The Russian economy can continue to struggle under the weight of war in Ukraine.
- Currency: Renminbi
- Major stock market reference: Shanghai Composite Index (SSE)
- Economic growth in 2022 (forecast): 3.3%
- Economic growth in 2023 (projection): 4.6%3
China played a major role in the decline in the value of emerging market assets this year, accounting for nearly one-third of the market capitalization of many emerging market indices. This means that Beijing’s policies play a big role, and these days, they have been cruel to the market.
China’s zero-COVID policy results in frequent closures, often of entire cities in short periods of time, disrupting economic growth. National protests began to spread in November, adding to the uncertainty that investors did not like.
Add to that China’s crackdown on its favorite tech stocks from foreign investors and restrictions on homeowners’ ability to restructure debt amid a growing housing crisis, and the result is a mix that weighs on the country’s seemingly unstoppable economic growth trajectory.
The benchmark Shanghai Composite Index lost about 15% this year, falling from 3,600 in January to about 3,000 at the end of November.
That said, next year could be better.
Morgan Stanley said in a recent research note that China is likely to shift policy priorities to focus on the economy, even predicting an end from zero COVID in April 2023. A full reopening will increase domestic consumption, which will greatly help the economy. Beijing also has more room to stimulate the economy, as it is not hampered by accelerating inflation elsewhere. The government invested about 1 trillion yuan ($146 billion) of stimulus in the economy in the third quarter alone.
Chinese home buyers are also likely to be long-term homeowners and are therefore less likely to sell than people who buy to invest, which will put further pressure on property prices. While this is a different issue for dispossessed Chinese property developers, Beijing has shown a willingness to save them. 7
All of which helps explain why the OECD raised its growth forecast for China to 4.6% next year from 3.3% in 2022. 3
- Currency: Real
- Main Reference Index: São Paulo Stock Exchange (BOVESPA)
- Economic growth in 2022 (forecast): 2.8%
- Economic growth in 2023 (projection): 1.2%8
With pro-business President Jair Bolsonaro out of office, replaced by the more socialist Luis Inácio Lula da Silva, now is the right time to invest in Brazil?
Da Silva inherited a number of economic challenges that could force him to make some tough decisions. His predecessor, Bolsonaro, introduced fuel subsidies to ease the pain of rising prices after Russia’s invasion of Ukraine, along with many other spending measures. 9 Maintaining these expenditures can jeopardize real value, while eliminating them can slow down the economy and cause inflation to rise.
A bright spot: rising commodity prices, among the country’s main exports, helped produce an annual economic growth forecast of 2.8% this year. 8 The benchmark Bovespa index is up 14% from its July 2022 low.
Lula’s economic policies show a more important role for the government in managing and regulating the economy, using commercial banks to stimulate the economy, and slowing or stopping the privatization of state-owned industries. At the same time, concerns about a global recession mean commodity prices are starting to cool, along with exports, one of the reasons the OECD says growth will slow to just 1.2% next year.
- Currency: Ruble
- Major stock reference: Mosbirzhi Index (MOEX)
- Economic growth in 2022 (forecast): (5.5%)
- Economic growth in 2023 (projection): (4.5%)11
Russia effectively pulled out of the global economy when it invaded Ukraine in February 2022 and the West responded with broad sanctions and an exodus of companies. In early November, the U.S. Commerce Department designated Russia as a “market-free economy,” citing what it said was “the resurgence of the Russian state’s influence in the economy.”
The massive diversion of resources to war has incurred economic costs, with GDP expected to contract in 2022 and 2023. 11th
Russian stocks also suffered a blow. The benchmark MOEX index, which stood at 4,150 in October 2021, lost nearly half of its value in July 2022 and has remained nearly flat ever since.
With Russian President Vladimir Putin showing no signs of thriving in his war in Ukraine, 2023 is likely to see little improvement for Russia’s beleaguered economy.
- Currency: Rupee
- Major stock market references: Stock market sensitive indices (Sensex)
- Economic growth in 2022 (forecast): 6.6%
- Economic growth in 2023 (projection): 5.7%
India’s economy, hit hard by the pandemic, recovered fairly quickly: by the end of 2021, the economy was developing in double digits. Growth stalled in mid-2022 as poor rainfall damaged important agricultural sectors. Consumers are becoming more cautious about non-essential purchases as food and energy prices rise, further limiting demand.
As India’s monthly energy and food import bill rose, the current account deficit widened in the July-September quarter to 2.9% of GDP, exacerbated by a weakening rupee, which made imports more expensive in local currency. Major inflation is above the Reserve Bank of India’s 6% target, mainly due to higher food prices, which in India account for a larger share of the consumer price index calculation than in other G20 countries.
Despite the challenges, the OECD predicts that India will become the second fastest growing economy in the G20 in fiscal year 2023 thanks to a narrowing current account deficit, possible falling government spending and falling import inflation. 15 Sensex rose about 5% to around 63,000 in December 2022 from just under 60,000 in January 2022.
- Currency: Rand
- Key Stock Benchmark: FTSE/JSE All Share Index
- Economic growth in 2022 (forecast): 1.7%
- Economic growth in 2023 (projected): 1.1%
South Africa’s economy returned to pre-pandemic growth rates in early 2022, driven largely by increased household consumption and increased demand for commodity exports. Then growth stalled as spring floods in the KwaZulu-Natal region shut down factories and an aging fleet of coal-fired power plants in the country causing widespread power outages that hurt mining, manufacturing and even agriculture. 18 Business confidence plummeted.
The FTSE/JSE All Share index, which started the year at around 73,750, fell to about 14% to 65,000 in June, just after the flood. 19th
One of the advantages was that coal exports to Europe increased after the war in Ukraine.
However, commodity prices are expected to decline in 2023. In this context, the OECD predicts that a warm growth rate of 1.7% in 2022 will slow to just 1.1% in 2023.
Things could get worse: The OECD expects private consumption to recover and private investment to increase as companies replace aging capital equipment. A planned separation from a national power company that will allow new companies to enter the market could reduce power outages. A rebound in international tourism will provide further assistance.