Page 28 - ISQ Outlook 2023

INVESTMENT STRATEGY QUARTERLY

A similar trajectory is likely across dollar-denominated
emerging market bonds. Yields have dropped sharply since late KEY TAKEAWAYS:
October, reflecting narrowing yield differentials and notably • Emerging markets enjoyed a golden age during the
lower “risk-free” yields as rate hike expectations in the U.S. first decade of the century, but this dissipated as
pared back. That this has taken place at the same time as the headwinds built up.
rally in share prices provides strong evidence that the improve- • The COVID pandemic has added to challenges, raising
ment has been built on a revival in investor risk appetite. concerns from population vulnerability to weakening
Again, the near-term sustainability of this rally is open to fiscal positions and austerity measures augmented
question as the global economy weakens, but as above, by elevated inflationary pressures and sharply higher
sentiment should improve as 2023 progresses, and yields interest rates.
should fall further in 2024.
• China’s “zero COVID” policy and the ongoing conflict
Emerging market equities have enjoyed a strong revival over in Ukraine have added to the uncertainty posed by
the autumn, the MSCI Emerging Markets Index exceeding the the global economic slowdown and put a brake on a
performance of the MSCI World Index of developed market broad-based revival in investor appetite.
equities by a comfortable margin, albeit that indices are still
well below levels they started the year. Overall performance • A shallow and short global recession, coupled with
masks significant regional divergence, with emerging Asian ebbing inflationary pressures and an easier monetary
equities performing strongly, boosted by speculation regarding policy outlook as 2023 progresses, should underpin a
a possible easing in China’s draconian “zero-COVID” policies, revival in investor interest.
while emerging Europe, Middle East, Africa and Latin America • The outlook for emerging market government bonds
have proved much more subdued. and dollar-denominated sovereign debt should
brighten as 2023 progresses, while the outlook for
Concerns regarding the near-term health of the global
economy and its adverse impact on corporate earnings may equity markets will become increasingly positive as
weigh on investor appetite as the New Year commences, even the global economy revives. Latin America and India
excluding uncertainty surrounding China and the duration of look appealing for longer-term investors.
military conflict in Ukraine, but sentiment and performance
should stage a steady improvement with key benchmarks
ending 2023 above prevailing levels with further gains likely in
2024 led by Latin America and India.

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