We think the fallout from China and other challenges is now receding. And considering that EM performance can be skewed by one or two dominant countries, top-line returns don’t always tell the full story. The emerging-markets benchmark includes a diverse group of countries, each with different policies, currencies and cultures, on distinct timelines in their business cycles. Through this wider lens we see at least four positive developments suggesting that EM investors will likely see a better 2022.
1. Vaccinations Are Up and Virus Fears Are Down
Threats linger from omicron and other potential variants. And while some EM countries lag in vaccination rollouts, penetration rates are broadly improving.
Moreover, populations and governments are increasingly learning to live with the virus. And with more people better protected, we expect fewer restrictions on economic activity. This should give more EM economies elbow room to fully reopen and further recover.
Countries such as Thailand, Vietnam and Indonesia have also dramatically reduced infection rates. As a result, they, along with India, will likely embark on economic recoveries and put bank credit losses all but behind them. And with large and younger vaccinated populations, they’ve begun to accept COVID-19 and all its variants as just a new fact of life, avoiding a return to restrictive lockdowns.
2. China Pressures Are Abating
China’s 2021 woes stemmed from a combination of shrinking credit availability, acute debt in the property sector and restrictive regulatory forces. Heightened competition with the US in technology and cybersecurity was another burden.
One big scare came from China’s deleveraging drive, made possible by the strong economic backdrop earlier in the year. This rattled the property sector, which has far-reaching importance to China’s economic health.
Evergrande—China’s second-largest developer—defaulted, forcing authorities to step up support. Stock prices negatively reacted, but contagion has been contained so far by broad restructuring and a call on banks to boost real estate lending and ease debt restrictions to shore up market liquidity. While we expect China will continue to discourage speculation, shares of developers and property management companies could recover if investor sentiment improves from last year’s overly pessimistic response.
Regulation temperament has been another sticky concern. But after a crackdown on education and tech companies last summer, we think China’s focus is now on implementing regulations rather than more tightening. This was the theme of December’s Central Economic Work Conference, where minutes showed a shifting emphasis to economic stability and energy, as well as a steady emphasis on carbon (green) initiatives, and away from regulation.
China recently started to loosen monetary policy and has ample room to ease further, in our view, after tightening for the past year. This should help stabilize the economic backdrop and support corporate earnings. The country’s credit impulse—the change in newly issued credit relative to GDP—seems close to an inflection point and is on the rise (Display).