EMs still in a sweet spot

Oksana Patron

19 April 2023

The emerging markets (EMs) are currently supported by a number of factors and could find themselves in a sweet spot as the markets are entering a period of slower growth, according to T.Rowe Price.

In its note on global asset allocation and investment environment, the asset manager said while global growth was expected to slow, it should come with an easing of inflation pressures, lower rates, and further weakening of the U.S. dollar, all of which could be supportive for emerging markets.

The recent outperformance of EMs, which went up over 17% off October’s bottom and could continue to benefit from a lessening of headwinds, was largely triggered by China’s surprise reopening from COVID lockdowns last fall.

On top of that, the recent data continued to show momentum and China policy makers were committed to stable growth, potentially providing a further boost.

The manager also stressed that recent banking crisis and unexpected oil supply cuts complicated inflation and financial stability puzzle for central banks, which could keep interest rate volatility elevated.

T.Rowe Price identified factors such as central bank missteps, resilient inflation, steeper growth decline, broadening banking crisis, and geopolitical tensions as key risks to global markets.

In this context, China reopening and resilient growth in Europe offered balance to otherwise negative sentiment.

“In light of the recent banking crisis, global central banks’ narrow focus on combating inflation has gotten more complicated as they are now faced with the added task of maintaining financial stability,” the manager said.

This means the central banks would need to reinstate price stability while shoring up confidence in the banking system. The recent initiatives included the launch of a new emergency lending facility, the Bank Term Funding Program in the US and the Bank of England’s hurried rescue of the gilts market in October.

“While rescue measures have seemed to quell a broader contagion for now, the immediate impact may be a further tightening of credit within the banking industry, which was already occurring prior to the crisis,” T.Rowe Price said.

“This added dimension has only made central banks’ mandates more complex, given the already limited visibility into the lagged impacts of their own tightening measures.”

As far as regional backdrop in Australia was concerned, consumer spending was at risk of mortgages being reset throughout 2023. Also, latest earning results highlighted concerns on margins going forward and the yield curve suggested that markets had become too sanguine regarding future rate path.

On the positive note, labour market remained tight and an uptick in immigration kept wage pressure stable. Following this, the economy remained surprisingly resilient, with even home prices showing signs of bottoming.