Emerging Markets Pressinformation

US interest rate policy dominates emerging markets

"The performance of emerging markets has always been characterized by global issues and risk assessments. In addition to events such as the commodities boom of the noughties, the global financial crisis, Covid 19 and the rise of China, the Fed's interest rate policy in particular has repeatedly had a very strong influence on capital flows to emerging markets," says Stefan Grünwald, bond fund manager at Raiffeisen KAG. The Fed's massive interest rate hikes over the past two years and high global inflation have also had a massive impact on the emerging markets. Even though inflation rates are now falling again, this decline has recently lost momentum.

Asia remains the global locomotive of the world economy

For the emerging bond markets, this means that they are preparing for a "higher for longer" scenario, i.e. bond yields and key interest rates that will remain at higher levels for longer than originally assumed. "The recent disinflationary effect should therefore be over, as global goods price inflation is picking up again slightly," says Grünwald. Looking at the global growth picture, the growth differential between the emerging markets and the developed markets has widened again after 2021 and 2022. However, Asia remains the global locomotive despite the decline in growth in China, according to Grünwald. There are also increasing signs that China's economy has bottomed out. Grünwald: "There will no longer be growth rates above 5-6% due to the Chinese property market. But even significantly more moderate economic growth will still have a positive impact on other emerging markets and the world in view of the sheer size of the Chinese economy."

International investors currently cautious - valuations are attractive in the long term

Outflows from emerging markets bonds have continued in recent months. After local currency bonds in particular were affected by the withdrawal of investors for a long time, increasing sales of hard currency bonds have also been registered since July. The US dollar financing options and liquidity situation of weaker emerging market countries has therefore deteriorated in recent months. However, the current yields and currency valuations largely anticipate the risks and expected debt restructuring by the capital market and therefore offer attractive valuation levels for long-term investments. However, a strong differentiation between countries and currencies must still be taken into account.

Emerging markets with great leverage for more sustainability

The emerging markets are of immense importance for the global transformation towards a more sustainable world. For this reason, it has become essential for sustainability-oriented investors to consider emerging markets in recent years with regard to globalisation and supply chains. Emerging markets can offer greater leverage, i.e. efficiency in improvements, for example in countries with lower ESG levels, but also tend to have a higher exposure to ESG risks and growth opportunities. "The central objective of ESG approaches for emerging markets must be to support sustainable development and sustainable potential. In this context, investing sustainably means, in particular, accompanying the transformation responsibly," says Grünwald.

Follow the principle of supporting and demanding

However, there are a number of challenges here: Apart from the fact that the different stages of development of emerging markets need to be taken into account in the ESG investment approach, a lower level of economic development also tends to mean a lower level of ESG development. In addition, the production of export goods has shifted substantially from developed markets to emerging markets in recent years. The fact that the largest raw material deposits are located in emerging markets and are naturally also mined there is also a challenging criterion for the ESG assessment of the markets concerned. These challenges therefore entail a strong qualitative differentiation of the countries. According to Grünwald, it is important to follow the principle of supporting and demanding when accompanying transformation.

Relative performance of emerging market equities vs. developed markets disappointing

For Jürgen Maier, who has been managing emerging market equity funds at Raiffeisen Capital Management for almost 20 years, the relative performance of emerging market equities compared to the developed markets is disappointing. "The phases of outperformance and underperformance have been long-lasting cycles over the past 35 years." And we are also currently in a downward trend, the main cause of which is China's stock market weakness.

China: Leading the way in renewable energies and e-mobility

"However, if you look at individual sectors and companies, there are very positive developments, particularly where China is concerned, and especially with regard to ESG," says Maier. For example, China is a global leader in investments in renewable energies, but also in the area of electromobility. "China backed the right horse years ago with e-mobility and is also more innovative than many of its competitors in terms of software and entertainment. They are also more than competitive in terms of price - compared to German manufacturers, for example. China has therefore developed into an important car exporting country," says Maier. There are very interesting, well-positioned companies here for investors.

India: first companies introduce maternity protection

India is also a very exciting market for equity investments, says Maier. The country could soon replace China as the growth engine of the global economy. In any case, India is clearly ahead in terms of population growth. Maier: "In India, we particularly like financial stocks that provide loans for affordable housing, such as HDFC Bank. IT outsourcing is also a very interesting business sector for us from a sustainability perspective. Companies such as Tata Consultancy Services were among the first to establish a maternity leave scheme in India, which has since become a role model for other industries." The "China plus One" business strategy has also had very positive effects. With a view to the supply chains, the aim is to avoid the construction of new production halls in China and to relocate to other regions such as India and Mexico, says Maier.

Attractive valuations

At least parts of the emerging markets could benefit from any upturn in the manufacturing sector, both in terms of corporate profits and share prices. "However, good selection is important. Although emerging market equities are generally valued much more favorably than equities in industrialized nations, it is primarily those companies and sectors with positive earnings revisions and a more optimistic outlook that have upside potential. This is particularly true for some Latin American and Asian markets, but also for some emerging markets in the Middle East and Europe. The major global emerging market share indices are currently trading at around the same level as at the start of the year. However, there have been considerable upward and downward movements in individual shares and countries over the same period," says Maier.

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Stefan Grünwald
Jürgen Maier

This text is intended for media representatives. Despite careful research, the information contained herein is for information purposes only, is based on the knowledge of the persons responsible for its preparation at the time of writing and may be changed by Raiffeisen Kapitalanlage GmbH at any time without further notice. Past performance is not a reliable indicator of the future performance of a fund. The contents of this document do not constitute an offer, a recommendation to buy or sell or an investment analysis.

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