Emerging markets are in a good position to see a US recession and may even be able to lure investors in.

That’s the message from money managers, including JPMorgan Chase & Co. Deutsche Bank AG may be dashing treasuries and other haven assets for fear of a contraction in the world’s largest economy. They say that beyond short-term turmoil, developing countries will be cushioned by cheaper valuations, higher yields, faster growth and, above all, a resurgence. China,

Given the current scale of losses in emerging markets, this seems like a tall order. Stocks and bonds have been hit by the sharpest declines since the 1990s, while currencies are suffering their worst losses on record, even beating the COVID-19 of 2020. And Argentina’s assets are set under increased scrutiny following the sudden resignation of Economy Minister Martin Guzmán on Saturday. He was replaced by a leftist economist.

So why are investors expecting the developing world to show resilience when the US recession hits?

“We may be close to extreme pessimism,” said Oliver Harvey, head of currency research for the Central and Eastern Europe, Deutsche Bank in the Middle East, Africa and Latin America. “There are reasons to think that emerging market performance may be better than previous recessions, including much lower foreign ownership of local assets, a relatively higher starting point for interest rates and cheaper valuations.”

History shows that the mere anticipation of the US economic crisis fuels early selling in emerging markets and leaves them at a cheap price when the contraction actually comes. For example, the US came out of the so-called Great Recession only in June 2009, but emerging market stocks and bonds had bottomed out in October 2008, even before the Federal Reserve began quantitative easing.

This time, the sell-off in emerging markets began in the first quarter of 2021, a year before the start in developed markets.

Grant Webster, Werner Gay van Pietius and Peter Kent of Ninety One wrote in an email, “EM assets are history and cheap relative to their developed-market peers.” “Current valuations suggest that a mild bearish price is already in place and that a hard bearish – although not our base case – is not far from price.”

encouragement nation

Of all the factors investors say will dampen the impact of a shrinking US economy, none rank above China. They are betting on a rebound in the world’s second-largest economy in the second half as the government gradually eases Covid restrictions and policymakers loosen monetary settings.

“If China is still growing well enough, it could partially ease the US or Europe’s fears of a recession,” said Claudia Calich, head of emerging market debt at M&G Investments. “While there are still potential macro headwinds and some vulnerable countries may face difficulties, prices and valuations have already adjusted substantially and a lot of negative factors are already costing the price.”

Fresh hopes that the US will reduce tariffs on Chinese imports will also improve sentiment.

However, there is some doubt that China could play a bigger role in shielding emerging economies from the US recession.

“Recovering from the zero-Covid-related shutdown in China will certainly be helpful,” said Kamakshaya Trivedi, co-head of global currency and interest rate research at Goldman Sachs Group AG. “I doubt it will completely shield emerging markets from adverse impacts, but it will reduce the impact.”

growth gap

While countries that rely on exports with weak external balances and low real yields, along with the US and Europe, will remain vulnerable, raw material exporters may be shielded from demand from China, the largest buyer, Taipei. Hui said, JPMorgan Asset ManagementChief Market Strategist for Asia.

According to Deutsche Bank, growth in developing economies will continue to outpace the US, providing support to local currencies. Nevertheless, the picture is diverse. While growth risks are rising in countries such as the Czech Republic and Chile, the outlook is strong in economies such as Poland and recovery continues in South Africa and Mexico, the bank said.

Overall, economists surveyed by the Bloomberg Project predict that emerging markets will grow more than twice as fast as developed markets by 2.5 percentage points in 2023. If and when America slips into recession, growth-chasing investors may be a little skeptical about where they should be headed.

“A broader emerging market recession is not our baseline, even if our allies expect one in the US,” Harvey said.