Emerging market equities were set for their worst annual performance since 2008 as higher interest rates, soaring inflation and the Russia-Ukraine war kept investors away from higher-risk assets.
The MSCI developing world equities index edged up 0.1% on Friday thanks to gains in some Asian markets, but it is down more than 22% for the year, its biggest percentage loss since the 54% drop during the financial crisis of 2008.
Stock markets in Hungary and Taiwan took the biggest hit this year, while Turkey stood out with a near 200% gain in lira terms as a plunging currency forced Turks to protect their savings against surging inflation.
The lira has shed about 29% this year, hitting a record low of 18.75 per dollar as recently as this week, reeling from a series of interest rate cuts by Turkey’s central bank despite inflation near 85%.
The central bank said on Friday it aims to lift the share of lira deposits to 60% of all deposits in the banking system over the next six months, and vowed to continue using regulations to support access to credit.
Emerging market central banks have delivered 93 rate hikes this year to battle surging inflation caused by a spike in food and fuel prices in the wake of the war in Ukraine as well as supply disruptions caused by the pandemic.
However, there were signs that the tightening cycle in EM was slowing, as Latin America and emerging Europe started hiking rates aggressively before the U.S. central bank.
“EM will be dealing with tightening monetary conditions, slowing global economy, high energy prices and inflation in 2023,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
“Our expectations is that, the first two, three quarters of next year will likely be challenging for global risk markets – until China is healthily back in the game, and inflation is sustainably headed lower.”
The Federal Reserve’s fastest rate hikes in decades meant a strong dollar that has piled pressure on EM currencies and made it expensive for developing countries to service their dollar-denominated debt.
The Argentine peso and the Egyptian pound have seen sharp depreciation this year, while the MSCI EM FX index has shed 4%, on course for its worst annual showing since 2015.
The Brazilian real outperformed this year, helped by a commodities rally, while Russia’s rouble was supported by Moscow’s capital controls.
On sovereign dollar bonds, J.P. Morgan EMBI Global index posted a 17.6% loss on total return – it worst since 1994, while the local currency bond index has lost nearly 12%. Sri Lanka and Ghana defaulted in 2022.
All eyes will be on China as it reopens following its COVID-19 lockdowns, but a surge in infection rates there has led to more countries imposing travel restrictions.
China’s yuan looked set for its worst annual performance in 28 years with an 8.6% decline this year, while Shanghai stocks logged their worst year in four. For GRAPHIC on emerging market FX performance in 2022, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2022, see https://tmsnrt.rs/2OusNdX
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(Reporting by Sruthi Shankar in Bengaluru Editing by Vinay Dwivedi)