Is 2023 the year to own emerging market shares?

Experts believe valuations across equity and fixed income emerging markets are “exceptionally attractive”, and some predict big returns, but not all.

Emerging markets look set to begin 2023 with an improving outlook as supply chains start to normalise and the US moves nearer to the peak of its rate hiking cycle.

Bank of America’s fixed-income team told clients recently that “valuations are more attractive, sentiment is improving, and fundamentals can turn very favourable”.

It highlighted the potential benefit of China’s reopening, but warned that several risks lurk on the horizon through deeper recessions or geopolitics: “Therefore, we start the year cautiously and focus on relative value trades and pockets of value until we have more visibility.”

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The bank’s more upbeat assessment comes after a grim emerging markets year as sustained US dollar strength and Federal Reserve policy tightening put pressure on economies to hike rates in order to protect their own currencies and fend off inflation.

The conditions contributed to the largest drawdown in emerging markets debt and equities since 1998 and 2001 respectively, when excluding the financial crisis.

Bank of America sees US rates and the dollar peaking in the first quarter of 2023, which it believes could open the door to a global rebalancing into emerging markets, as long as growth excluding China does not decelerate too fast.

Swiss bank UBS is braced for growth in emerging market economies to slip to 3.5% in 2023, which outside the pandemic year of 2020 would be the weakest level since 1980.

It sees downward pressure on emerging market exports continuing for at least another four to five months, with China recording its worst GDP performance since 1976, despite expectations for the reopening of its economy from the second quarter.

However, UBS is backing the return profile to improve across emerging market assets once the global growth picture begins to improve, most likely in the second half of the year.

It added: “As US inflation further moderates and China cyclically recovers from the second quarter, we expect volatility to decline across emerging market assets.”

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The bank is looking for emerging market equities to deliver a return of between 8%-12% over the year but with the upside for currencies limited to 2-3% against the US dollar.

Ashmore Group (LSE:ASHM), the FTSE 250-listed specialist emerging markets asset manager, said in October that valuations are “exceptionally attractive”.

Ashmore’s assets under management recently declined by $8 billion (£6.4 billion) or 12.5% in the three months to September, comprising net outflows of $5 billion (£4 billion) and negative investment performance of $3 billion (£2.4 billion).

Chief executive Mark Coombs said at the time that investor risk appetite remained limited amid the risk of recession in many countries.

He added: “Valuations across equity and fixed income emerging markets are exceptionally attractive and yet investors have lighter positions following a period of lower risk appetite.

“This provides a firm foundation for performance and higher allocations to capture the longer-term growth and investment opportunities available in emerging markets as macro economic conditions begin to improve.”

Ashmore shares surged this afternoon, standing 10.6p higher at 233p, after a weaker-than-expected US inflation reading of 7.1% boosted hopes that Federal Reserve policymakers are near the peak of their tightening cycle.