Emerging & Frontier Markets: 2022 Outlook

27 January, 2022

2021 was a challenging year for emerging markets due to slowing global growth, the spread of new COVID-19 variants and the impact of China’s regulatory tightening.

New variants of COVID-19 formed a significant part of the economic landscape in 2021. In particular, the Delta and Omicron variants monopolised the year, but high vaccination rates allowed the gradual easing of mobility restrictions. Emerging market countries displayed a tightening bias as part of efforts to rein in inflationary pressures and pre-empt any tightening by the Fed to mitigate risks of capital flight. China was a key concern as tighter fiscal and monetary policies, regulatory changes driven by “Common Prosperity” and a zero-COVID-19 tolerance hampered investor sentiment.

Despite the negative performance of Emerging markets as a whole, signs of a revival outside China started to show – driven by rising prices for commodities, manufacturing strength in select countries, the rise of the digital economy in Emerging markets and the economic and financial discipline shown by the emerging world leaders.

Looking ahead to 2022

We remain constructive about the outlook for 2022. Valuations remain attractive with the discount of emerging market equities to developed market equities expanding further in 2021. Current account balances reflect the amount nations need to borrow abroad to finance their purchases and have shifted into surplus as institutional reforms in major emerging markets have strengthened their economic discipline against crises. Many Emerging market central banks continue to normalise rates and remove monetary stimulus as their economies recover. Early normalizations will potentially prevent further corrections or aggressive reactions to global economic conditions, while the resilience of Emerging markets should continue as they are well positioned to benefit from strong growth this year.

China’s regulatory uncertainty could also continue. However, regulatory clarity should eventually return, as it has in previous political cycles. China’s authorities have shown that they remain dovish and pro-growth. It appears that the People’s Bank of China is accelerating easing measures to stay ahead of the curve and to prevent expectations and demand from softening further. South Korea and Taiwan could see continued export growth on the back of robust demand for technology hardware. In India, strong export demand and government capex will remain the key drivers of growth. EMEA, Russia and South Africa are supported by strong commodity prices while in Latin America, Brazilian elections remain a risk. However, valuations have fallen to extremely low levels, creating interesting investment opportunities.

Drivers of performance in 2022

Across emerging markets, positive structural drivers remain present and new investment opportunities are likely to emerge. The widespread commitments by most developed, and some developing, countries to achieve carbon neutrality is likely to intensify electrification and renewable energy efforts, creating multiannual support for the relevant industries. Solar and wind power are set to play a more important role, while producers of “green wave” materials, like copper, uranium and lithium may also be beneficiaries of this trend.

The recovery of global travel will also be a boost to those emerging economies where tourism is a large proportion of GDP -for example Greece. Tourist destinations offer exposure to the release of pent-up demand following Covid disruption.

Today, the portfolio is well positioned to capture the growth opportunities in the current environment. Our portfolio is trading on a forward price to earnings multiple of 10.2x for 2023 and has a potential upside of 56% based on our estimates. We are positive on the outlook of the portfolio and our holdings.

Risks to the portfolio include a rally in the US dollar, an increasingly hawkish Federal Reserve and deteriorating relations between China and Taiwan.

The information shown above is for illustrative purposes only and is not intended to be, and should not be interpreted as, recommendations or advice.

Forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so.

The statements and opinions expressed in this article are those of the author as of the date of publication, and do not necessarily represent the view of RWC Partners Limited. This article does not constitute investment advice and the information shown is for illustrative purposes only.

Unless otherwise stated, all opinions within this document are those of the Redwheel Emerging and Frontier Markets team as at 27th January 2022.

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RWC seeks to minimise any conflicts of interest, and endeavours to act at all times in accordance with its legal and regulatory obligations as well as its own policies and codes of conduct.This audio is directed only at professional, institutional, wholesale or qualified investors. The services provided by RWC are available only to such persons. It is not intended for distribution to and should not be relied on by any person who would qualify as a retail or individual investor in any jurisdiction or for distribution to, or use by, any person or entity in any jurisdiction where such distribution or use would be contrary to local law or regulation.This audio has been prepared for general information purposes only and has not been delivered for registration in any jurisdiction nor has its content been reviewed or approved by any regulatory authority in any jurisdiction. The information contained herein does not constitute: (i) a binding legal agreement; (ii) legal, regulatory, tax, accounting or other advice; (iii) an offer, recommendation or solicitation to buy or sell shares in any fund, security, commodity, financial instrument or derivative linked to, or otherwise included in a portfolio managed or advised by RWC; or(iv) an offer to enter into any other transaction whatsoever (each a “Transaction”). No representations and/or warranties are made that the information contained herein is either up to date and/or accurate and is not intended to be used or relied upon by any counterparty, investor or any other third party.RWC uses information from third party vendors, such as statistical and other data, that it believes to be reliable. However, the accuracy of this data, which may be used to calculate results or otherwise compile data that finds its way over time into RWC research data stored on its systems, is not guaranteed. If such information is not accurate, some of the conclusions reached or statements made may be adversely affected. RWC bears no responsibility for your investment research and/or investment decisions and you should consult your own lawyer, accountant, tax adviser or other professional adviser before entering into any Transaction. Any opinion expressed herein, which may be subjective in nature, may not be shared by all directors, officers, employees, or representatives of RWC and may be subject to change without notice. RWC is not liable for any decisions made or actions or in actions taken by you or others based on the contents of this audio and neither RWC nor any of its directors, officers, employees, or representatives (including affiliates) accepts any liability whatsoever for any errors and/or omissions or for any direct, indirect, special, incidental, or consequential loss, damages, or expenses of any kind howsoever arising from the use of, or reliance on, any information contained herein.Information contained in this audio should not be viewed as indicative of future results. Past performance of any Transaction is not indicative of future results. The value of investments can go down as well as up. Certain assumptions and forward looking statements may have been made either for modelling purposes, to simplify the audio and/or calculation of any projections or estimates contained herein and RWC does not represent that that any such assumptions or statements will reflect actual future events or that all assumptions have been considered or stated. Forward-looking statements are inherently uncertain, and changing factors such as those affecting the markets generally, or those affecting particular industries or issuers, may cause results to differ from those discussed. Accordingly, there can be no assurance that estimated returns or projections will be realised or that actual returns or performance results will not materially differ from those estimated herein. Some of the information contained in this audio may be aggregated data of Transactions executed by RWC that has been compiled so as not to identify the underlying Transactions of any particular customer.The information transmitted is intended only for the person or entity to which it has been given and may contain confidential and/or privileged material. In accepting receipt of the information transmitted you agree that you and/or your affiliates, partners, directors, officers and employees, as applicable, will keep all information strictly confidential. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information is prohibited. The information contained herein is confidential and is intended for the exclusive use of the intended recipient(s) to which this audio has been provided. Any distribution or reproduction of this audio is not authorised and is prohibited without the express written consent of RWC or any of its affiliates.Changes in rates of exchange may cause the value of such investments to fluctuate. An investor may not be able to get back the amount invested and the loss on realisation may be very high and could result in a substantial or complete loss of the investment. In addition, an investor who realises their investment in a RWC-managed fund after a short period may not realise the amount originally invested as a result of charges made on the issue and/or redemption of such investment. The value of such interests for the purposes of purchases may differ from their value for the purpose of redemptions. No representations or warranties of any kind are intended or should be inferred with respect to the economic return from, or the tax consequences of, an investment in a RWC-managed fund. Current tax levels and reliefs may change. Depending on individual circumstances, this may affect investment returns. Nothing in this document constitutes advice on the merits of buying or selling a particular investment. This audio expresses no views as to the suitability or appropriateness of the fund or any other investments described herein to the individual circumstances of any recipient.AIFMD and Distribution in the European Economic Area (“EEA”)The Alternative Fund Managers Directive (Directive 2011/61/EU)(“AIFMD”) is a regulatory regime which came into full effect in the EEA on 22 July 2014. RWC Asset Management LLP is an Alternative Investment Fund Manager (an “AIFM”) to certain funds managed by it (each an “AIF”). The AIFM is required to make available to investors certain prescribed information prior to their investment in an AIF. The majority of the prescribed information is contained in the latest Offering Document of the AIF. The remainder of the prescribed information is contained in the relevant AIF’s annual report and accounts. All of the information is provided in accordance with the AIFMD.In relation to each member state of the EEA (each a “Member State”),this document may only be distributed and shares in a RWC fund(“Shares”) may only be offered and placed to the extent that (a) the relevant RWC fund is permitted to be marketed to professional investors in accordance with the AIFMD (as implemented into the local law/regulation of the relevant Member State); or (b) this audio may otherwise be lawfully distributed and the Shares may lawfully offered or placed in that Member State (including at the initiative of the investor).Information Required for Distribution of Foreign Collective Investment Schemes to Qualified Investors in SwitzerlandThe representative and paying agent of the RWC-managed funds in Switzerland (the “Representative in Switzerland”) FIRST INDEPENDENT FUND SERVICES LTD, Klausstrasse 33, CH-8008 Zurich. Swiss Paying Agent: Helvetische Bank AG, Seefeldstrasse 215, CH-8008 Zurich. In respect of the units of the RWC-managed funds distributed in Switzerland, the place of performance and jurisdiction is at the registered office of the Representative in Switzerland.