Key points
- China reopening: Activity in China has fallen during the reopening, echoing the experiences of Hong Kong and Taiwan, but a rebound will likely follow. The extent of the rebound will depend on the consumption and property market recoveries.
- Geopolitics: The war in Ukraine remains at a stalemate, and we expect this to continue for the foreseeable future. There are several key elections to monitor this year, including those in Poland, Thailand, and Turkey.
- Growth and fiscal: With the exception of China, we expect growth to slow this year in emerging markets (EM), given the lagged impact of past tightening and the likelihood of falling goods demand from developed markets. However, emerging markets may be poised to outperform developed markets.
- Monetary policy and inflation: EM central banks started raising interest rates earlier than their developed market counterparts and are therefore further progressed in their hiking cycles, with several either close to the peak or finished. Interest rate cuts are being priced in, although we feel this is a little premature unless there is a deep economic slowdown.
- Rates, credit, and currencies: With inflation rolling over and central bank rates peaking, the outlook for local rates is compelling. EM currencies also look attractively valued, but direction could be dictated by the U.S. dollar.
Emerging markets (EM) are in a state of transition this year as they work through the structural shocks left by the coronavirus pandemic and Russia's invasion of Ukraine. It's been a strong start so far thanks to China's reopening and markets pricing in the goldilocks scenario of declining inflation and a soft landing. But given how difficult this benign outcome is to achieve, risks remain, in our view. How this all plays out over the next few months will likely have important implications for how EM assets perform in 2023.
China Reopening
China's economy is reopening and at a much faster pace than anticipated. As expected, economic activity has initially been disrupted, as it was in Hong Kong and Taiwan when they lifted restrictions from a similar starting point. After this initial fall, however, economic growth should rebound; but to what extent depends on the recovery in consumption. While savings are high, the government has provided relatively modest consumer stimulus relative to other countries, and confidence remains an unknown coming out of the pandemic. While we are reasonably constructive on the outlook, the rebound will likely be initially oriented toward domestic services. We expect the reopening to lead to some inflation in China as domestic demand recovers, although lower commodity price pressures and slack in the labor market will likely temper the rise.
As the global economy was only moderately impacted by China's zero‑COVID policy, the positive impact of China's reopening will also likely be moderate. Representing around 15% of world gross domestic product,1 China will struggle to change the global trajectory on its own, but it could help to temper this year's expected slowdown. The spillover benefits from China's reopening are very specific, with increased commodity demand likely, particularly in oil and gas. There could also be increased demand for other imports and the potential for a positive tourism impact for the Asia region, with Thailand being seen as a key beneficiary.
This post was funded by T. Rowe Price
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1As of December 31, 2022.
