For most of the past 14 years, assets in lower-income countries underperformed their US counterparts as, along with a strong dollar, most of the US monetary stimulus FED flowed to the Wall Street markets.
This narrative, however, began to change this month.
Major investment banks, including Morgan Stanley and JPMorgan anticipate that the dollar has peaked and weakened over the next year, benefiting emerging markets in the process. and providing more room for the recovery of currencies such as the yen and the euro.
Similarly, a weaker dollar will help reduce imported inflation, ease the cost of food imports in lower-income countries, and reduce debt problems for countries with dollar holdings.
“We see room for a recovery in emerging markets,” Morgan Stanley said in a 2023 strategy outlook paper, adding: “First, we expect to see weakening dollar conditions, which is always a starting point.” that help”.
They also projected that “global growth will recover from its lowest point in the first quarter until the end of the year and will be led by emerging economies.”
The MSCI Emerging Markets Index, which tracks 24 emerging countries with 1,386 components, has risen 12% so far this month, the biggest gain since March 2016, twice the pace of its European counterpart and five times the gains of the S&P 500.
The relationship between emerging and US assets jumped to 9.5% this monththe highest range since May 2009.
“New cycles bring new leadership and after the longest bearish period for the emerging market, we see a strong recovery in their prices in 2023,” they projected from Morgan Stanley.
In the same way, emerging currencies appreciated 3.1%, in their best performance since March 2016.
Another reason for the increases is the monetary policy of the central banks of these countries.
Several emerging countries such as Brazil and Hungary raised their interest rates proactively -before in the core countries- leading to real interest rates returning higher than those of developed countries, if measured cumulatively, favoring activities of the call “carry trade” in these markets.
Lastly, emerging market bonds also outperformed US bonds in November, with gains not seen since 2016, reversing a year of heavy losses for dollar- and local-currency-denominated bonds.
Source: Ambito
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