Banking sector turmoil, the war in Ukraine, and U.S.-China relations, both with and without weather balloons, have been only several key elements having impacted markets on a global level. At abrdn, we remain focused on three key issues effecting emerging markets:

China recovery rather ho-hum

Investors may have been left feeling a little underwhelmed at the strength of the recovery coming out of China since having lifted COVID restrictions in October 2022. Unlike what was witnessed in the West once restrictions were eased and met with a significant economic recovery and strong response by consumers – we haven't seen that same effect in the first quarter of 2023. Perhaps the key, from our perspective, may be several factors. China's government remains committed to stabilizing their property market before involving the private sector in driving economic growth. The Chinese government has been doing more to try and reassure the private sector, even phoning investors that they're indeed back and open for business. So, while the recovery story has been somewhat lackluster, we do look forward to seeing more to come on that front throughout 2023.

Risk contagion

The other aspect from the first quarter has been the financial contagion and knock on sentiment toward banks and financial institutions, particularly in developed markets. We did see a significant sell-off in some of the financial names, particularly those in parts of Asia, that may have been due to behavioral investing: the fear of the unknown. Something we have grown to almost expect as a result of previous financial crises. Most investors have, however, carried on, but when looking at the underlying conditions within many of these banks in emerging markets, it is very different from what we're seeing in developed markets.

Dollar on the decline?

When we look at growth in the US, we look at the yield curve, which indicates that the US economy is heading toward recession. But would a US recession, entailing weaker corporate profits in the US, for certain lead to a weaker global economy? We believe it could make a case for assets outside of the US outperforming over the next nine months or longer. Therefore, the US recession story is important in regard to both the state of the dollar, but also the relative earnings profile of the US versus the rest of the world, specifically emerging markets. Fed market pricing has already begun to suggest a deeper cutting cycle, which, as the chart below illustrates, the dollar index has already begun to reflect.

Source: Bloomberg, April 2023.

What's next for emerging markets?

One of the big issues coming from Q1 that we do foresee is the likely slowdown in the second half this year going into next year and what effect it will have on bond market growth in the US. We believe the financial contagion issue, as a result of the banking crisis, has further increased the likelihood of a US recession. A recession that would mean a peak for US interest rates and could be accompanied by dollar weakness. This, we believe, remains a positive backdrop for emerging markets. However, on the flip side, is inflation. Remember the adjective that has lately been associated with inflation is sticky meaning it's not going to come down as quickly as anticipated, or as some may hope, and that may come with some surprises.

Lastly, we believe the Chinese recovery will begin to start ramping up from slack to full throttle, due to the property market recovering. Property prices, a key driver for Chinese economy, are again on the rise, which provides indication that consumer confidence is returning. As far as emerging markets and the products of attractiveness, there is an underpinning to some industrial cap. Given the positive trends in the global renewable energy story with corporate expenditure extracting minerals from the ground than building things out occurring in most emerging markets, we see this as compelling reason to continue to invest.

Important information

The information contained herein is current at the time of distribution, intended to be of general interest only and does not constitute legal or tax advice. abrdn does not warrant the accuracy, adequacy or completeness of the information and materials contained in this document and expressly disclaims liability for errors or omissions in such information and materials. abrdn reserves the right to make changes and corrections to its opinions expressed in this document at any time, without notice.

Some of the information in this document may contain projections or other forward-looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must make his/her own assessment of the relevance, accuracy and adequacy of the information contained in this document, and make such independent investigations as he/she may consider necessary or appropriate for the purpose of such assessment.

Any opinion or estimate contained in this document is made on a general basis and is not to be relied on by the reader as advice. Neither abrdn nor any of its agents have given any consideration to nor have they made any investigation of the investment objectives, financial situation or particular need of the reader, any specific person or group of persons. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document.

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