The Fed's "eagle" is getting stronger, why are these analysts optimistic about emerging markets?

In the early morning of Thursday Beijing time, the Federal Reserve was about to announce the last interest rate decision of the year, and overnight, the latest US PPI for November was released again, a year-on-year increase of 9.6%, a new historical record. The Fed is now widely expected to announce at the meeting that it will double its taper to $3 billion a month starting in January. For the prospect of interest rate hikes, many market analysts believe that the statement of the Fed's December meeting may be a big revision from the previous one, and the new dot plot may show that most officials expect multiple rate hikes in 2022.

Recently, concerns about spillovers from expectations of Fed rate hikes and the emergence of the Olmikron strain have weakened recovery prospects for emerging market economies. However, looking ahead to next year, some analysts do not believe that emerging markets will be too affected by the Fed's interest rate hike expectations and the Olmikron strain, and even believe that emerging markets may become the first choice for investment in 2022. Analysts are particularly bullish on Asian markets, where the fundamentals are most solid among emerging markets, and many of them expect the divergence of monetary policy between China and the United States to attract more overseas funding in 2022.

Emerging markets the top choice for investment in 2022?

As of Dec. 14, the iShares MSCI Emerging Markets ETF, which tracks large and mid-cap listed companies in developing countries, has lagged significantly behind the S&P 500 so far: the ETF is down 6 percent so far, while the S&P 500 is up 24 percent over the same period.

According to the International Finance Association (IIF), overall non-resident inflows to emerging market economies, with the exception of China, were negative at the end of November for the first time since March 2020.

Still, some analysts are bullish on how emerging markets will perform next year. Kristina Hooper, invesco's chief global market strategist, believes that emerging markets remain the first choice for investment in 2022 despite expectations of Fed rate hikes and the emergence of a new Olmikron strain.

"We've always known that emerging market economies take longer (than advanced economies) to get universal vaccinations. But it's clear that this popularity is happening and will continue into 2022. "So, from the perspective of a stronger economic recovery from an economic reopening, emerging market economies will repeat what advanced economies have experienced this year in 2022." ”

HB Bank's head of market strategy, Heng Koon How, is not as bullish on emerging markets as Hooper, but in his view, at least for Asian markets, the Fed's acceleration of taper and expectations of interest rate hikes next year will have little impact and are unlikely to lead to volatility in Asian markets.

In 2013, the Fed's sudden start of scaling back its asset purchase program sparked a "shrinkage panic." At the time, investor panic sparked a sell-off on U.S. Treasuries and caused Treasury yields to soar. As a result, capital outflows and currency depreciations have seen in Emerging Market Economies in Asia, forcing central banks in the region to raise interest rates to protect their capital accounts.

This time, however, Heng Koon How believes that the situation is not the same as in 2013, and the Fed Tapers and interest rate hikes are not expected to cause volatility in Asian markets. "So far, overall, all central banks in Asia are well prepared and their foreign exchange reserves are at record highs," he said. And the view that the Fed has tightened its policy this time has been well conveyed. So when the Fed really starts raising interest rates, the region should be better able to cope with so-called capital outflows. ”

He added that Asia's strong trade fundamentals could also support the region, helping it withstand the fed's Taper. "Asia's trade base is solid and, in a sense, guided by China. Asia's economic model is export-oriented, which helps create a strong environment and strengthen the stability of local currencies. Asia is greeting fed rate hikes on a steady and strong tone. He pointed out.

Alexandre Tavazzi of PictetWealthManagement shares a similar view, seeing promising growth prospects for countries in the region.

Particularly optimistic about the investment opportunities in China and ASEAN next year

In terms of segmentation, in the eyes of analysts, the investment opportunities between ASEAN and China in all emerging economies are particularly significant.

Yatawazi said that although ASEAN's economy has been hit by the epidemic this year, ASEAN will stand out as one of the few regions in the world where growth prospects are "quite strong" and growth rates in 2022 will be higher than in 2021, which is one of ASEAN's investment highlights.

Citibank's Weekly Wealth Management report also said that the ASEAN macro economy is expected to improve further in 2022. "Affected by the Delta virus, the growth rate of the ASEAN economy has been dragged down a bit this year, especially in the second and third quarters. Year-to-date market performance has varied widely across ASEAN countries, with Indonesia's Jakarta Composite and Thailand's stock index up more than 10 percent and Vietnam up more than 30 percent, but the Philippines index and Malaysia's Kuala Lumpur Composite index are relatively weak. But Citi said, "With the further improvement of vaccination rates in ASEAN countries, the ASEAN economy is expected to further open up in the future." Singapore is the fastest recovering country in the ASEAN region, and in the third quarter of this year, Singapore's GDP has returned to pre-epidemic levels. Citi expects that in the fourth quarter of this year, the GDP of Indonesia, Malaysia and Vietnam will also return to pre-epidemic levels. In addition, the GDP of the Philippines and Thailand is also expected to return to pre-pandemic levels in the second half of 2022. ”

Overall, Citi believes that as long as the vaccine continues to be effective in preventing severe diseases, the Future Olmikron strain will not hinder the process of ASEAN economic reopening, and the impact of the epidemic on ASEAN countries is gradually declining. Citi expects that in 2022, with the exception of Vietnam, the GDP growth rate of the five ASEAN countries is expected to accelerate from 3.8% this year to 5%.

In addition to the fact that the impact of the epidemic will dissipate, Citi also noted that the Fed's tightening of monetary policy in 2022 may have a limited impact on ASEAN compared to the "shrinkage panic" in 2013.

Specifically, the report analyzes that, first, there has been a marked improvement in the current account of ASEAN countries. On the one hand, the terms of trade of commodity exporters have improved, on the other hand, the outlook for foreign direct investment (FDI) is also expected to continue to improve in the context of supply chain shifts, and second, there has been a significant decline in ASEAN government debt held overseas. In the context of the Fed's tightening of monetary policy, the decline in the proportion of overseas debt is expected to reduce the pressure of foreign exchange depreciation in ASEAN countries; third, a stronger dollar may actually benefit some ASEAN countries, on the one hand, the dollar is stronger and the local currency is weaker, or good for the exports of some countries, on the other hand, the domestic inflation level of ASEAN countries may be relatively moderate.

Based on the above two points, Citi believes that the ASEAN market may have long-term investment opportunities. With the further vaccination of vaccines in ASEAN countries and the further recovery of the economy, there may be opportunities for mean reversion in the ASEAN market. Moreover, in the current highly volatile market, global diversification and dispersion are still important. In the Asian market, the ASEAN market can be used as an option for investors to lay out the Asian market.

As citi research notes, another emerging-market investment option that is widely favored by the market is China.

Wang Lei, managing director and fund manager of Thornburg Investment Management, said in a recent interview with First Financial Reporter that China's economy benefits from self-circulation, and the adjustment of the US dollar will guide international floating capital to China's high-quality assets, and there is a high probability of net inflows of funds next year. He said that the difference between the monetary policies of China and the United States, the tightening of monetary policy in the United States, and the loosening of China's stability, this situation has rarely occurred in the past, and has a far-reaching impact on the economy and capital markets, which will cause international investors to pay close attention to the impact of monetary policy differences on assets.

Wang Lei further said: "As the Fed starts the cycle of interest rate normalization, the phenomenon of a strong US dollar will have greater currency depreciation pressure on emerging markets, especially relatively weak emerging market currencies. China's monetary policy will drive import growth and cushion the pressure on other countries from fed rate hikes. Therefore, from the perspective of the stock market, this phenomenon is beneficial to China's risk assets, there will be more investment opportunities, and it is expected that the Chinese stock market may reverse the downward revision trend in 2022 or even surpass the performance of the US stock market. ”