The following assessments and positioning represent a snapshot and may change at any time and without notice. They are not meant as a forecast for the future performance of the financial markets or for the funds of Raiffeisen KAG.

The marked price recovery for equities and bonds seen in July lost momentum in August and was replaced by new price declines in many places. One interesting aspect was that the EM equity markets held up much better than the developed markets on the whole. In fact, some of them – such as Turkey and Brazil – turned in substantial gains. In line with equities, the bond markets were on the decline, nearly without exception. Here as well, however, the Emerging Markets were among the stronger market segments in August.

Fighting inflation top priority for central banks

Despite waning inflation dynamics, the central banks in the USA, the Eurozone, and several other countries intensified their rhetoric. Fighting inflation is the top priority, with very little consideration being given to economic growth or recessionary risks. This was not what most market participants had hoped for. The Fed’s lead role in terms of interest rate hikes in the developed markets and the weakening global economy pushed the US dollar higher. The fact that the Emerging Markets nevertheless fared quite well is rather unusual and is a good sign. We would not read too much into this yet, however. Despite an already pronounced fundamental overvaluation, there are still plenty of signs suggesting that the strength of the US currency will persist. Paired with a further slowdown in the global economy and increasingly restrictive monetary policy around the world, this type of environment means headwinds and high volatility for the equity markets in general – and for those of the Emerging Markets in particular.

From a long-term perspective, EM bonds in several countries offer quite attractive risk-return profiles, especially local-currency bonds. In the short to medium term, however, there are still significant risks for further price gains due to rising US yields and falling exchange rates versus the US dollar. The situation is similar for EM equities.

Global decline in growth is unmistakeable

The signs of a further decline in global growth are increasing. Taiwan, South Korea, and Singapore are seen as “canaries in the coalmine” for international trade and economic activity due to their strong orientation towards exports. In all three countries, inventories are growing and export activity is declining substantially. In must be noted that, while the monetary policy in the USA and the Eurozone is becoming more restrictive, it is still very loose and accommodating on the whole. Based on the very clear statements made by leading central bankers, this will change considerably in the coming quarters, and these dampening monetary policy effects will then spread through the global economy on a delayed basis. At the moment, economic activity is not being impacted all that much by interest rate hikes, but rather primarily by the price increases and disruptions for energy and food. The situation for these two components has admittedly eased a bit recently.

But the outlook for 2022 and 2023 does not promise lasting relief or improvement. It is important to keep in mind here that a potential end of the inflation in and of itself would not represent an improvement of the situation, but would only mean that the deterioration has stopped. For example, if the income of private households does not keep pace with the price increases seen in recent months, the financial burden caused by more expensive food and energy will continue. The latter is a particularly significant problem for the majority of the Emerging Markets. Because the vast majority of the population uses a very high proportion of their income for these expenses, the price increases are inevitably making it so that much less money is available for other, less essential goods and services. This will likely put additional pressure on many companies’ profit margins. However, government budgets, political systems, and previous geopolitical alliances are also being strained. An increase of roughly 40% in food prices within 12 months culminated in the Arab Spring in 2010. The price increases since 2020 already amount to 40 to 60%, albeit spread out over two years. As a result, severe domestic political turmoil is likely to emerge sooner or later in many Emerging Markets, but this time in developed countries as well, which could also subsequently have a geopolitical impact.

Ukraine-Russia front deadlocked

Meanwhile, the military situation in Ukraine and the status of the confrontation between Russia and the Western alliance appear to be deadlocked, and there is no quick resolution or détente in sight. All indications suggest that the associated disruptions will last until at least 2023. Nevertheless, there is some good news. Due to fiscal aid and the temporary nature of some negative factors (e.g. heat and drought), the economic situation in Europe may stabilise in the first half of 2023 and growth could improve slightly again. At present, it is unclear whether the USA will see a severe recession, only a mild one, or possibly even none at all in the coming quarters. Incidentally, this relatively comfortable situation for the US economy also partially explains the strength of the US dollar. However, continued robust economic development in the USA allowing the country to dodge a recession would have a downside for the rest of the world: In such a scenario, inflation in the USA would remain so high that the Fed would likely hike interest rates to an even higher extent than is currently priced in, which in turn would have a negative impact for the global bond markets and provide further upside impetus for the US dollar.

Amidst all of the uncertainties and conflicting economic data, one thing can likely be said about China with a fair amount of certainty: It will not be able to rescue the global economy like it did in 2008/2009. At best, a moderate acceleration may be attainable, but it will not be enough to have a major global effect.

Recession worries weighing on commodity prices

The global growth slowdown that has already occurred or is still looming has pushed many commodity prices lower. In the event of further problems for China’s economy (e.g. real estate sector, COVID strategy) and a recession in the USA, there is a risk of further price declines. Particularly in the case of crude oil, however, we have to be prepared for the opposite scenario, because oil prices have been pushed down by the sales from the USA’s strategic reserve and recession worries. If the latter prove to be exaggerated, another marked rise in oil prices is certainly possible. This could be further fuelled by the fact that a significant portion of the “ammunition” from the US oil reserve has already been used up (and that it will have to be replenished through purchases in the near future).

Beyond this short-term, cyclical outlook, shortages in the global oil supply are looming starting in the mid-2020s, despite the rapid expansion of renewable energy production from electromobility and from nuclear power. Paradoxically, some of the measures being taken against the high energy prices now could contribute to this. In this context, it must be noted that even the peak oil prices from this year were substantially lower than the record prices seen in 2008. Adjusted for inflation, the peak prices from back then would correspond to a level of roughly USD 200 per barrel today. Thus, while it is fair to talk about a crisis when it comes to gas prices (particularly in Europe and parts of Asia), oil prices are still a long way off from crisis levels.

Overall, it is clear that conditions do not yet favour risky assets in general or EM equities in the short to medium term. However, this may change in the first half of 2023. Over the long term, the valuations and fundamental outlooks for many Emerging Markets remain good to very good, although they vary significantly from case to case, so careful selection is naturally important, as always.

Despite careful research, the provided information is intended as non-binding information for our customers and is based on the knowledge of the staff responsible for preparing these materials as of the time of preparation and is subject to change by Raiffeisen Kapitalanlage-Gesellschaft m.b.H. (Raiffeisen KAG) at any time without further notice. Raiffeisen KAG assumes no liability whatsoever in relation to this information or verbal presentations based on such, in particular with regard to the timeliness or completeness of the information presented and the sources of information, or in respect of the accuracy of the forecasts presented herein.