The idea that emerging markets have priced in all the negatives and are ready for a bounce-back is a rather “courageous claim”, according to Taimur Baig.
“You could argue that India has had some buoyancy, so you could argue for the [emerging] markets, but by and large EMs have not done very well, for the simple reason, that most EM economies have not really recovered from the pandemic,” the managing director and chief economist at DBS Group Research said in an interaction with BQ Prime’s Niraj Shah on the Navigating Through Uncertainty series.
The EM equities, he said, didn’t follow the U.S. stock market in the massive Covid recovery seen in the last two years.
EMs, he said, are beginning to reopen only this year, with tourists coming back and confidence in people to deal with the pandemic firming up, while in the U.S. and Europe, “that’s a 2021 story”.
According to Baig, because “EM valuation is far more favourable” than in the U.S., and that the U.S. cycle is good 12 months ahead of the EMs in terms of reopening, there’s something constructive to be said about EMs, notwithstanding the headwinds coming from interest rates and the current volatility”.
“We don’t need a recession to have major headwinds in our part of the world. Interest rates have gone up, they are going up much more than they have so far in the second half of the year, and this is a big shock,” he said. “That’s an extraordinary amount of delta for the global economy to absorb.”
“Already, we are seeing currencies under pressure in the region and capital flows dry up and credit corporate credit spreads widen—these are all in reaction to what has happened so far. So, you can only imagine what will happen in the next six months with respect to spreads and effects.”