Prime time to increase emerging market exposure

By Peter Marber, CIO of Emerging Markets at Aperture (part of Generali Investments' ecosystem of asset managers).

Emerging Market (EM) asset prices have been shaped by three phenomena in the new millennium:

1) The strength of the US dollar-

2) China’s growing economy

3) Increased geopolitical stability tied to growing cross-border trade.

The decline in US interest rates and mushrooming global economy tied to China provided tailwinds helping propel EM debt and equities, but this has been working in reverse in 2022– tailwinds are now headwinds. The US dollar has been strengthening due to record interest rate hikes, and China’s economy has decelerated domestically due to strict Covid lockdown policies, hurting stock and bond prices worldwide. And don’t forget geopolitical stability–that ended in February when Russia invaded Ukraine and heavy trade sanctions were enacted.

When will the storm end? Judging from past cycles, EM asset prices typically turn a few months after the last US rate hike. And one would expect China’s economy to resume solid growth again after the government relaxes its Covid restrictions. But geopolitical tensions and sanctions may linger, which makes the timing of along-awaited EM really difficult to predict. In the meantime, EM assets–debt, equity, and currencies–all have cheapened dramatically in 2022 and offer investors an opportunity to increase exposure at bargain prices.