What investors should watch out for in emerging markets in 2023

It’s been a tough 12 months for emerging markets, with more governments going bankrupt, currencies hurting and double-digit losses in both stocks and bonds, though many investors are optimistic that 2023 could bring some relief.

Here are the events, trends and themes that investors expect to shape the landscape of emerging markets in the coming year.

1. high rates, low growth

A slowdown in the pace of interest rate hikes in the United States and other major economies could set the stage for an emerging market recovery in 2023, with a weaker dollar and falling inflation providing much-sought relief.

Developing economies are expected to hold on to their growth differential relative to their developed counterparts, but recession fears in the US and Europe are casting a shadow over global markets in general, especially in the first half of the year.

“Economic downturns, along with aggressive monetary tightening and the commodity and geopolitical disturbances that induce them, will be temporarily painful in financial and emerging markets,” said David Folkerts-Landau, group chief economist at Deutsche Bank.

The recovery could be delayed if emerging central banks lack room to lower interest rates for most of the year.”

2. reopening of China

China’s reopening from its Covid-19 lockdowns will be bumpy, but accounting for nearly a fifth of global GDP, the prospect of a strong rebound at a time of sluggish global growth is enticing.

Analysts forecast a strong rebound in consumption and investment in the world’s second largest economy from mid-2023.

“If you look at the savings rate in China right now, it’s very high,” says Erik Zipf, head of emerging markets equities at DuPont Capital. “We think that’s going to be spent as soon as people feel comfortable going out, that’s going to provide a pretty big tailwind from an economic perspective.”

3. war in Ukraine

Russia’s invasion of Ukraine has roiled markets and the world economy, and how the war progresses in 2023 will be important, whether it be a continuation, an escalation or a move toward a resolution.

On a global scale, the war has transformed energy markets and inflationary pressures, food security and the perception of geopolitical risk, factors that are often felt most strongly in emerging economies. Emerging Europe has also felt the immediate humanitarian impact, from refugee movements to the brain drain from Russia.

4. debt restructuring

A growing list of countries is in debt distress in the wake of Covid-19 and the war in Ukraine: Zambia and Ethiopia are attempting to review their debt burden under the Group of 20 Common Framework. Sri Lanka and Ghana defaulted in 2022.

But a more complex mix of creditors – including the emergence of China as the world’s top bilateral lender – compared to previous episodes of debt distress has made proceedings slow and complex.

“Getting everyone to sing the same song in the same key is quite a challenge,” said Tim Samples, associate professor of legal studies at the Terry College of Business.

The number of countries locked in capital markets among the smallest and most risky economies is at all-time highs, though there could be a redemption.

“There really isn’t a lot of debt coming due next year,” says Carmen Altenkirch, sovereign emerging markets analyst at Aviva Investors. “The country that is probably most at risk is Pakistan.”

5. Brazil under Lula 2.0

President-elect Luiz Inácio Lula da Silva will take office on January 1 with markets already looking for signs of a fiscal anchor to rein in spending in Latin America’s largest economy.

Monetary policy makers have highlighted the inflationary risks stemming from Lula’s proposed spending of 168 billion reais ($31.6 billion) to fulfill campaign promises.

“Investors want to know if the debt/GDP ratio in Brazil is explosive or under upward pressure, if we are going to reach 100% debt/GDP soon or if we can stabilize it in the next two to three years,” Gordian said. Kemen, head of Emerging Markets (Western) Sovereign Strategy at Standard Chartered Bank.

6. elections in Turkey

President Tayyip Erdogan could face the biggest political challenge of his two decades in power when the Turks go to the polls in the most high-profile vote in emerging markets.

The country is facing a rising cost of living and a plummeting currency, with the lira falling to record lows against the dollar in recent days. Years of unorthodox monetary policy have caused many investors to reduce their exposure to the country’s assets. A change in leadership could mark a star turn.

“This is potentially the most interesting story of 2023, one way or another,” said David Hauner, head of Emerging Markets at Cross-Asset Strategy & Economics, EMEA, Bank of America Global Research.

7. elections

Other emerging market countries are facing elections. Voters in Nigeria, Africa’s most populous country, will elect their next president in February, though Muhammadu Buhari will sit out due to his term limitation.

In Latin America, Argentina will hold presidential elections in October. Two-time president and vice president Cristina Fernández de Kirchner declared that she “would not be a candidate for anything” in the general elections, after an Argentine court sentenced her to six years in jail in a high-profile corruption case.

In Poland, elections scheduled for autumn could unseat the country’s nationalist Law and Justice (PiS) party, potentially changing Warsaw’s tense relations with Brussels.