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Emerging markets outlook brightens, sparks ‘cautious optimism’

By Charbel Kadib
4 minute read

The near-term outlook for emerging markets has been revised to the upside, with sustained disinflation supporting valuations and driving portfolio flows, according to Oxford Economics.

Oxford Economics has updated its forecast for GDP growth across emerging markets (EM) for the second time in months, now anticipating growth of 2.6 per cent in 2023 (excluding China), up from 2.2 per cent.

According to the group’s EM economist, Lucila Bonilla, the revision was supported by growing confidence in “disinflationary trends”, helping to improve sentiment towards EMs.

“We have argued that a constellation of domestic, global, and structural factors would support emerging market disinflation,” Ms Bonilla said.


“Their economies struggled more to recover from the pandemic and EM central banks, mindful of risks to credibility, got ahead of the policy curve.

“Recently, weaker commodity prices, a smaller shock than in advanced economies, and a higher share of goods in EM CPI baskets meant headline inflation declined more and second-round effects have been mitigated.”

Among the reasons for “cautious optimism”, Ms Bonilla continued, is the expected increase in portfolio flows, driven by “cheap valuations”.

“Peak US yields, a relatively weaker dollar, and disinflation should make it easy for EM central banks to cut rates,” she said.

This view is shared by global asset manager BlackRock, which remains overweight on EM equities, claiming developed markets are “not pricing in the recession we see ahead”.

However, Ms Bonilla flagged downside risks to the group’s EM outlook, warning a protracted tightening cycle from the US Federal Reserve could weigh on GDP growth over the medium-long term.

As such, Oxford Economics has decreased its growth outlook in 2024 by 3 percentage points to 3 per cent.

This reflects expectations of “constrained” demand as the “lagged impact of tighter monetary and fiscal consolidations” filter through and “taper trade”.

“An extended Fed tightening cycle that triggers a hard landing would hurt global demand,” she said.

“A stronger-for-longer dollar or a prolonged period of EM’s demand overheating could lead to protracted above-target inflation.

Earlier this week, the Federal Open Market Committee (FOMC) held the funds rate at 5–5.25 per cent at its June board meeting to allow for more time to “assess additional information” relating to the overall trajectory of the US economy.

The FOMC said recent indicators suggest the economy has “continued to expand at a modest pace”, pointing to “robust” jobs numbers and continued inflation stickiness.

But concerns over the longer-term stability of the US banking system following three collapses in March and April, and signs of a tightening in credit conditions, have clouded the Fed’s monetary policy outlook.

Notably, the FOMC updated its forward guidance for monetary policy, with median projections for the terminal funds rate increasing to 5.6 per cent.

This shifted in line with updated expectations for US GDP growth, inflation, and unemployment.

Real GDP is now expected to grow 1 per cent (revised up from 0.4 per cent), the unemployment rate is tipped to end the year at 4.1 per cent (revised from 4.5 per cent), and core inflation is tipped to moderate to 3.9 per cent (revised from 3.6 per cent).

As for the timing of future cuts to the funds rate, Fed chair Jerome Powell said the central bank does not expect to commence an easing cycle in 2023.

The median expectation among FOMC members is for rate cuts of over 100 bps over the course of 2024, before dropping to 2.5 per cent over the longer term.

But according to Oxford Economics, EM markets would ultimately outperform DM peers with average quarterly growth of 1 per cent — double DM growth.

Emerging markets outlook brightens, sparks ‘cautious optimism’

The near-term outlook for emerging markets has been revised to the upside, with sustained disinflation supporting valuations and driving portfolio flows, according to Oxford Economics.

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