For emerging markets, US yields and China’s economic situation are crucial

For emerging markets, US yields and China’s economic situation are crucial

the view

If China returns to a more sustainable growth path, combined with lower US bond yields and a weaker dollar, emerging country stocks and bonds are likely to outperform.

By Leo Campagna
23 November 2023 at 07:55
Financialounge - Emerging Markets Raiffeisen Capital Management

For more Increase in US bond yields Geopolitical tensions contributed to the climate of uncertainty in financial markets in October, which was dominated by the negative sentiment that emerged in September. It is a context in which spreads on emerging debt widened slightly compared to US government bonds, while global equity indices and stock markets in developing countries suffered a loss of about 4.5%.

New minimums reached for stocks and bonds

However, as the CEE and Global Emerging Markets team points out Raiffeisen Capital ManagementOn this occasion “temporary lows” may have been reached in both equities and fixed income. It is not unlikely that a recovery will occur by the end of the year also in light of the positive signals emerging from the stock market rally in November following the sharp decline in bond yields in the United States of America. “Some signs appear to confirm that this could be the beginning of a lasting recovery that could form a more positive trend toward the end of the year,” the team explains.

The global economy is slowing down

However, the outlook is still not very positive, in the long term, at least on the economic front. In Europe, in particular, economic growth appeared generally weaker than expected. One fact above all: Chinese exports surprised negatively Especially due to weak flows to the European Union. There is no improvement in sight for Europe, not even from major indicators, while a slowdown in the US economy is expected in the coming quarters. Overall, global economic momentum remains negative, although China’s economic growth has stabilized.

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A temporary stock market rebound is possible

However, at least a temporary rebound in stocks is possible because markets should have already, at least partially, integrated these negative developments. However, for a long-term sustainable uptrend, it must at least take shape Economic turning point. Pending this, the expected positive dynamics of interest rates in the first half of 2024 could provide support to both the economy and financial markets.

A suitable scenario for emerging country bonds

In the United States, regardless of whether, extent, or duration of recession occurs, a fairly large decline in US yields – at least for short and medium maturities – as well as a significant decline in US bond yields are likely to take shape. Weakness of the US dollarThis is a result of lower interest rate differences with many other countries. It is a scenario that could facilitate emerging country bonds, especially those in local currency.

Focus on US revenues, the dollar and the Chinese economy

The problem is that all predictions about a US recession so far have turned out to be premature. Moderate and slightly longer weakness in the US economy may not be so bad for most emerging markets. “The positive effects of lower US bond yields and a weak US currency could actually prevail. In addition, if China returns to a more sustainable growth path, the outperformance of emerging country stocks and bonds cannot be ruled out at all.

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