• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Stocks

Emerging Markets Set to Outperform in 2023: Here's Where to Look

These are the emerging markets to target next year, with EM growth set to easily outrun that of the recession-bound developed world.
By ALEX FREW MCMILLAN
Nov 23, 2022 | 01:00 PM EST
Stocks quotes in this article: HNHPF, AAPL

Emerging markets should post solid growth next year, according to Société Générale, with an overall expansion of 3.8% across their economies. What makes that all the more impressive, if proven correct, is that developed markets are likely to slip into recession almost across the board.

"Emerging markets are likely to sustain a moderate expansion in 2023, contrasting with a pronounced slowdown in developed markets," SocGen's cross-assets team write in their year-ahead EM Outlook 2023 report.

This should help produce a significant differential between EM and DM performance. The 2021-22 period has seen a differential north of 2 percentage points to the advantage of better developed-market economic performance. The situation will now likely reverse, with the 3.8% growth in emerging markets contrasting with 1.2% growth in the developed world. The chances are also better for emerging-market growth to be revised upward than there is for positive surprise in developed economies, where forecasts are in decline.

SocGen's central scenario for the emerging-market growth outlook next year "is one of resilience and stability," Phoenix Kalen, the French bank's director of emerging-market strategy, explains.

One reason for the disconnect is that inflation appears to have peaked in emerging markets. That takes the heat off central banks, and means the rate-hike cycle is coming to a close, so "growth headwinds may ease as policy rate hikes halt," Kalen continues.

These trends may play out in slow motion. Commodity prices don't appear set to pile on pressure, and there should be a moderate decline in inflation across 2023. But it's "sobering," SocGen notes, for emerging-market central bankers that there's little scope for an easing cycle to start next year. Inflation will come down very gradually, reverting close to target and trend in 2024.

Another factor driving the differential between emerging and developed economies is the nature of post-pandemic recovery. While emerging economies have taken time to find their feet, developed factories were quickly back to humming. The monthly figures coming out as 2022 nears its end, though, indicate that manufacturing activity is plunging sharply in the developed world, while it is stable and near the point of expansion in EMs.

It appears that the United States will dip into recession either in 2023 or 2024, though the downturn is likely to be brief. Still, it may finally dent the power of the U.S. dollar, which has been exceptionally strong in 2022. That situation will likely reverse in 2023, with Asian currencies particularly well-poised, though we may still see declines in frontier FX. Overall, SocGen expects emerging-markets currencies to lose 1.5% in value by the end of next year.

Where to Look in Emerging Markets in 2023

If investors should favor emerging markets over developed ones in 2023, where should they look?

There's a persistent problem affecting the normal pattern of investment in the form of U.S.-China tensions, which continue to force a disconnect between the two economies. China's zero-Covid policy also does not help, significantly disrupting the Chinese economy, and hurting the public's (and consumer) confidence.

We hear Wednesday that there have been violent protests at the Foxconn Technology Group (TW:2354) (HNHPF) factory complex known as "iPhone City." Hundreds of workers broke out of the dormitories that house them in the early hours of this morning, pushing and shoving past the "Big White" hazmat-clad guards attempting to keep them in. There were then clashes between workers and riot police at the complex, in the central Chinese city of Zhengzhou.

According to posts on Twitter, which is banned in China but equally can't be censored, recently recruited workers are demonstrating, angry that as an anti-Covid measure they haven't been kept separate from "old" workers who were already on site. The new workers, hired in a recent recruitment drive in which they were promised signing bonuses and higher-than-normal wages, also say the company hasn't lived up to its promises.

You have to sympathize with the workers. The dorms and campus, home to some 200,000 employees, currently look much like a prison, with barbed wire around the perimeter gates and patrols to spot people leaving. Workers are put through many different routines of testing, mealtimes, work shifts, and isolation should they fall sick. They're not free to come and go as they please, with the local authorities insisting anyone who leaves does so only through approved state-organized transport that takes them to quarantine if they exit the campus.

These short-term disruptions are affecting production, and make China less attractive as a production base. Of even greater impact long term are measures like the ban on the shipment of high-end chips and chip technology to China put in place by the Biden administration.

Such measures go way beyond any tariffs from the era of former president Donald Trump. Trump used tariffs as a bargaining chip, hoping to in fact drive greater trade with China at better terms. This greater trade would necessitate closer ties between China and the United States. The Biden ban on exporting chip technology cuts to the heart of the supply chain between China and the United States, forcing companies to diversify production away from China. It cleaves the China-U.S. tech supply chain apart.

U.S. imports from China are massive, at US$542 billion for 2021, but are stagnating. They comprised 22% of U.S. imports in 2018 but account for only 18% of U.S. imports now, the economics team at T.S. Lombard note. During that period, U.S. imports from the rest of the world rose 38% but were flat from China.

De-globalization will not happen uniformly, and will be "a lengthy and drawn-out process," Lombard's chief emerging-markets economist, Lawrence Brainard, says in a note to clients.

Apple (AAPL) has been making more than 90% of its products in China, with the Zhengzhou complex of Foxconn making more iPhones than anywhere else on earth. Lombard notes that Apple has 150 suppliers in China but is looking to ramp up alternatives outside the country, primarily in India and Vietnam. Apple had only 18 suppliers in those two countries five years ago, a figure that has risen to 37 now. By 2025, Apple may be making 25% of its products outside China, per a J.P. Morgan forecast. Its behavior is well-watched given Apple's high profile, but other manufacturers are going through the same process.

India and Vietnam are set to be the primary beneficiaries of de- and re-globalization, Lombard predicts. The process may actually simply result in a broader diversification in global trade. Southeast Asian nations in the form of Indonesia, The Philippines and Thailand also stand to gain.

The prime losers from re-globalization and production shifts are Taiwan, South Korea and of course China. Many Chinese companies are also hustling to diversify production abroad. Lombard has an overallocation to equities in India and Indonesia, and is underweight Taiwan and South Korea. It has also been negative on Chinese stocks, but the recent selloff after the 20th National Congress in October has seen it shift to a neutral stance.

Asian emerging markets should therefore provide fertile for equity investors in 2023. China bulls and buyers beware, with the long-term structural changes supporting the surrounding nations that stand to benefit as we see production shift.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.
TAGS: Economic Data | Interest Rates | Investing | Markets | Politics | Stocks | World | China | India | Emerging Markets (South America, Asia, Middle East) | U.S. Equity

More from Stocks

Bulls Are Still Banking on This Market

James "Rev Shark" DePorre
Mar 31, 2023 4:43 PM EDT

Ironically the worst banking crisis since 2008-2009 has been a positive market catalyst.

Could Constellation Brands Be Facing Further Declines?

Bruce Kamich
Mar 31, 2023 1:56 PM EDT

What's not yet known is if the stock is recession resistant.

IonQ Stock Has Taken a Quantum Leap

Bruce Kamich
Mar 31, 2023 1:18 PM EDT

Here's where my price targets are now.

Shares of Cintas Are Uniformly Crisp

Bruce Kamich
Mar 31, 2023 11:05 AM EDT

I see no technical reason yet to turn neutral or even bearish.

Here's Why I'm Investing in This Hawaiian Bank

Bret Jensen
Mar 31, 2023 10:10 AM EDT

For one, its deposit base is stickier than most.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 08:21 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    How a Trader Becomes a Money Manager
  • 04:00 PM EDT CHRIS VERSACE

    AAP Podcast: This Solar Company Is a Head-Turner

    Listen to my interview with Brian Roth, CEO of sol...
  • 01:56 PM EDT PETER TCHIR

    Very Cautious

    I am very cautious here. I don't like how the c...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login