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At Intercontinental, we see positive momentum in emerging market equities, specifically in emerging Asia. China re-opening and the easing of COVID restrictions have been a positive catalyst, and we’re seeing it in the data. The macro picture is also improving, China PMI is above 50 again and the return to work after the Chinese New Year was uneventful. This was a concern for many since we saw a spike in COVID cases and lockdowns last year which put more pressure on the markets. Chinese officials also announced an end to their crackdown on big tech, which has improved the overall sentiment.

Keep in mind that the 2022 sell-off was a global event, which had an impact not only on China but the rest of the globe. As we know, the market is a discounting mechanism, and recession expectations where a big reason why we had that selloff last year. Markets tend to rebound in anticipation of stabilization, and risky assets like Emerging Markets can benefit from that. This has been reflected in the performance of equity markets in 2023, where we see risky assets like the tech-heavy Nasdaq outperforming the DOW and S&P.

This risk-on positioning is also evident within fixed income. Emerging markets debt is catching investors attention both on hard and local currencies. On a relative value basis, Emerging Markets Local Currency bonds look attractive. A rally in risky assets would also put some pressure on the dollar, so local currencies should benefit. However, we also see higher yields in Emerging Market dollar denominated debt, which could be very attractive to more risk averse clients looking to participate in the space.

Just a few weeks ago, we saw a new issue coming out of Mexico. The state own oil company, Petroleos Mexicanos, PEMEX, came out with a 2BN, 10-year, dollar-denominated bond at a yield of 10.375%. This new issue was heavily oversubscribed with demand over 10BN. So now that spreads in these type of emerging market bonds have widened, we see some opportunities in the asset class.

That being said, we should also be conscious that these risks come at a price given that emerging markets can be more volatile than high grade debt or developed markets equities. An example of this is the recent crisis in India following Adani Group’s demise. Yet another example is the mounting tensions between the US and China after the spy balloon incident. Fixed income is also more sensible, as evident by Mexico’s recent decision to raise rates by 50 bps, higher than expected and decoupling from the US where we saw rates rising at a lower pace. With Banxico’s terminal target rate of 11.5%, we can expect at least one more hike before the summer.

Jerry Orosco
Vice President and Portfolio Manager