Resilience in the face of global uncertainty

Investors are facing uncertain times – a period of market volatility, geopolitical challenges, widespread inflationary pressure, and fear of recession in some developed economies. But against this difficult backdrop, emerging market and developing economies are expected to outpace the growth of advanced economies by 2.5 percentage points in 2022¹.

“Ultimately, emerging markets are much better prepared for a challenging global economy than they were a few years ago,” said Mark Tucker, Group Chairman of HSBC Holdings, at the opening of the 2022 HSBC Global Emerging Markets Forum in conversation with Surendra Rosha, Co-Chief Executive of HSBC Asia-Pacific.

Mr. Tucker cited several factors behind this position of strength. Emerging markets have limited currency exposure on their debt, they have better macroeconomic management than in the past and in many cases, governments and central banks have more room to manoeuvre when it comes to policy.

Bright spots can be found across the broad universe of emerging markets. Middle Eastern countries, such as Saudi Arabia and Qatar, are benefiting from high energy prices, while India’s economy grew 13.5% in the April to June quarter².

The resilience of many developing economies could lead investors to rethink how emerging markets should be traded when the global economy is under pressure, said Mr. Tucker. The traditional approach is to go underweight on the asset class when markets become averse to risk. The investment community, he said, is starting to realise that this is no longer necessarily the case.

Going forward, investors will be able to consider these fast-growing economies according to local factors, with less of a focus on their relation to developed economies.

Increasing affluence is another factor that is powering growth in emerging markets and strengthening a narrative of emerging market growth that is increasingly independent of developed markets.

In Asia excluding Japan, for example, absolute financial wealth grew by USD5.1 trillion in the 2020 to 2021 period³. Growing affluence allows people to spend more on a wide array of goods. This means demand from developed economies for manufactured goods will become relatively less important. This will lead to more trade directly between emerging markets.

Despite the broadly positive backdrop, emerging markets face a number of significant challenges. One is the growing debt burden, with 80% of the rise in global debt in 2021 coming from emerging markets⁴. As interest rates continue to increase, higher borrowing costs will make it hard for some countries to roll over their debt. Economies running deficits, in particular, could have issues finding credit towards the end of the year.

But with the emerging market debt to GDP ratio at around 65%⁵, the level of leverage is manageable, said Mr. Tucker. “We no longer have the sort of currency mismatch or fixed exchange rates that amplified the Asian Financial crisis, and emerging economies have more FX reserves than they have ever had.”

Another threat to development is the rise of protectionism, with several major economies withdrawing from international trade by putting up barriers that hinder the flow of goods and services. However, Mr. Tucker emphasised how free trade is a means to foster cross-border collaboration and reduce inflationary pressures.

“Isolating the six billion people who live in emerging markets is counterproductive for everyone,” he said.

Another threat to development is the rise of protectionism, with several major economies withdrawing from international trade by putting up barriers that hinder the flow of goods and services. However, Mr. Tucker emphasised how free trade is a means to foster cross-border collaboration and reduce inflationary pressures.

“Isolating the six billion people who live in emerging markets is counterproductive for everyone,” he said.

On climate change, Mr. Tucker emphasised the need for all countries to get on board to reduce carbon emissions, and that emerging markets will play an important role in the energy transition.

However, while the environment and climate is a key part of ESG, it is increasingly no longer the sole focus of companies and investors. The pandemic damaged the incomes of many millions of people living in emerging markets, highlighting the importance of social issues as people rebuild their lives after COVID-19. Governance is also a growing consideration, as investors and other stakeholders hold companies to higher levels of accountability on everything from labour issues to environmental impact.

“These issues are multi-dimensional and require a careful response” said Mr. Tucker.

A large part of the investment case for emerging markets is the strong growth potential that they offer. This is an attractive story that in the past has been interrupted by significant crises but in the current global downturn, emerging markets remain resilient compared to their developed peers.

This is largely due to competent economic management by policymakers. To maintain an upward trajectory, they will need to handle their debt burdens, the threat of protectionism and focus on realising sustainable development.