IN FOCUS6-8 min read

Outlook 2023: Emerging markets

China shopping covid


Tom Wilson
Head of Emerging Market Equities
David Rees
Senior Emerging Markets Economist

Emerging market economies

There are at least three reasons to think that emerging market economic growth will slow in 2023.

First, our expectation that the US will follow the eurozone and UK into recession means that global demand for goods is likely to soften. That will be a particular threat to small, open economies in Asia, Central and Eastern Europe (CEE) and Mexico that rely on exports to drive growth.

Second, while the reopening of China’s economy may lend support to demand for natural resources, slower global growth is likely to weigh on commodity prices. At the very least, this suggests that commodity-exporting emerging markets (EMs) are unlikely to see the boosts to their terms of trade that are generally needed to drive growth. And there is a risk that this driver will go into reverse.

Third, tighter domestic economic policy will increasingly weigh on growth. Fiscal policy is generally tightening as governments look to repair the damage done to public finances during the outbreak of Covid-19, while the lagged impact of previous large interest rate hikes will also sap demand. Deteriorating balance of payments positions mean that rates may need to rise further in parts of Asia and CEE if global financial conditions continue to tighten.

The good news, however, is that EM inflation is around its peak and should start to fall back during the course of 2023. The impact of sharp increases in commodity prices since the Russia-Ukraine conflict in early 2022 will start to reverse as base effects in food and energy inflation become more favourable. A combination of tighter policy and slower growth will ultimately ease core pressures.


Easing inflation will start to relieve pressure on real incomes and probably allow some central banks, notably in Latin America, to begin lowering interest rates again in the second half of 2023, setting up a cyclical recovery as we head into 2024.

Emerging market equities

There are four potential supports for emerging equity markets in 2023:

- Move into an endemic Covid policy in China

- Global disinflation

- US dollar stabilisation or depreciation

- Valuations that now price weak near-term earnings expectations

China: potential for rebound

China may see a cyclical recovery. The economy has been under pressure against a backdrop of zero-Covid policy and stress in the real estate sector. China now appears to be moving to an endemic approach to managing the virus. New domestically delivered vaccines support a renewed push on vaccine penetration. A move to an endemic state will significantly reduce the risk of persistent macro pressure.

In terms of the real estate sector, prior tightening in combination with a regulatory clampdown on developer leverage (debt) led to a crisis of confidence and a marked downturn in sales in 2022. This is not easy to fix but the authorities are incrementally adding policy support.

Headwinds remain: global growth will weigh on export performance in 2023. However, consumption and real estate are now at a low base and an endemic Covid policy is giving the market greater confidence in a cyclical rebound.

Disinflation could drive US dollar weakness

We expect global disinflation through 2023. As rising interest rates in EMs meet this disinflation, improving real (or inflation-adjusted) interest rates will provide greater support for emerging currencies, which look broadly cheap. The US dollar’s real effective exchange rate (REER) - i.e. its value compared to a weighted average of several other currencies - is expensive versus history and may continue to soften if conviction rises that the Federal Reserve (Fed) is moving successfully to re-anchor inflation and Fed expectations have peaked. A softer US dollar should allow EM currencies to recover, alleviating pressure on EM central banks and financial conditions.

Valuations are relatively cheap

The global growth outlook for 2023 is poor and questions remain as to the path of inflation and interest rates. However, valuations reflect a more difficult earnings outlook. Uncertainty and short-term earnings stress can present investment opportunities. We have begun to deploy cash into stocks where we believe valuations now offer attractive entry points. In particular, we have been adding back to technology companies in South Korea and Taiwan that offer good structural growth. Equity valuations are broadly cheap versus history and an EM currency recovery would enhance returns for US dollar investors.

The coming months may provide opportunities

The economic outlook for 2023 is weak and uncertainty and volatility may remain elevated in the near term. Valuations have improved, earnings expectations have been resetting and currencies are broadly cheap. 2023 may bring a peak in the monetary cycle and 2024 may bring better economic conditions. Investors should continue to look for opportunities to add exposure in coming months.

Important Information

The contents of this document may not be reproduced or distributed in any manner without prior permission.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.

Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.

This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.


Tom Wilson
Head of Emerging Market Equities
David Rees
Senior Emerging Markets Economist


Emerging Markets
Emerging Market Equities Team Schroders
Market views
Economic views
Outlook 2023
Alpha Equity
Follow us

Contact Us

Level 33, Two Pacific Place, 88 Queensway, Hong Kong

(852) 2521 1633

Online enquiry: Please complete the web form below and we will reply as soon as possible.

Contact us

The investments mentioned in this website may not be suitable to all investors. The information contained in this website is provided for reference only and does not constitute any investment advice. Investors are advised to seek independent advice before making any investment decision.

Investment involves risk. Past performance is not indicative of future performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Please refer to the relevant offering document including the risk factors.

This website is intended for Hong Kong residents only. Non-Hong Kong residents are responsible for observing all applicable laws and regulations of their relevant jurisdictions before proceeding to access the information contained herein. Schroder Investment Management (Hong Kong) Limited is regulated by the SFC. The website (excluding Schroder Provident Plan related pages) has not been reviewed by the SFC.

The website is issued by Schroder Investment Management (Hong Kong) Limited.