Asian Markets to Support Emerging Markets Rebound in 2023

Published: February 27, 2023

Global Emerging Markets Outlook 2023 report released by Asset Management company Federated Hermes Ltd.

Emerging markets are set to rebound in 2023, according to the Federated Hermes' Global Emerging Markets Outlook, boosted by the re-opening of China. Rebounds in South Korea, Taiwan and Brazil and the stability of India, Indonesia and Mexico will support emerging markets’ growth.

While emerging markets (EM) underperformed developed markets (DM) in 2022, this was distorted by the China lockdown. Stripping out China, emerging markets performed in line with the developed world, the report states.

“In addition to trough valuation and light investor positioning the differential between emerging and developed markets is set to expand on the back of favourable demographics, manufacturing capabilities and availability of critical resources,” said Kunjal Gala, London-based Head of Global Emerging Markets at Federated Hermes Limited.

China is at a critical juncture and faces three principal challenges: geopolitical rivalry with the US, the ongoing fallout from Covid-19 and issues in its property sector. Chinese equities are approximately 25% cheaper compared to the historical average on the MSCI China index. The report authors expect the Chinese market to perform in 2023 if the economy re-opens and policymakers successfully stabilise the property sector.

While investors are likely to focus excessively on the impact of the re-opening of China’s economy, the prospect of a less hawkish US Federal Reserve, and possibly rate cuts in the latter half of 2023, the Outlook looks beyond the near-term momentum to ten potential medium to long-term challenges and opportunities for emerging markets:

1. China: Opportunities beyond re-opening
2. India: 2020-2030: India's decade ahead
3. Brazil: A lost opportunity or time to get constructive
4. Memory Chip Industry: From cyclical to structural
5. Supply chains: reallocation to create long-term winners
6. Commodities and Energy: Long-term case
7. Electric Vehicles: a multi-year opportunity
8. Global tourism: Hopeful in 2023 and beyond
9. Inflation: Will China's re-opening fuel inflation
10. ESG: Relevance for EM in a complex world