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Stephen Rudman: Good day, today is Wednesday, December 7th, 2022. Welcome and thank you for watching Ashmore's EM in 10. My name is Stephen Rudman and I'm a member of Ashmore’s New York client facing team. 

Today, I’ll be asking Gustavo Medeiros, Ashmore's Global Head of Research, his thoughts on Ashmore's 2023 market outlook, as we sit here on the cusp of a new (and hopefully better) year for markets. Also, Gustavo will be publishing a white paper that will have a bit more detail. So, Gustavo's goal here is to give you some high points of what we think 2023 may look like. Gustavo, welcome, as always. I turn the floor to you to share your thoughts of what might be ahead for us as we head into 2023.

Gustavo Medeiros: Thank you very much for that kind introduction. Yes, we are about to publish Ashmore’s 2023 outlook. This year, we thought we’d use an analogy based on soccer and this year’s World Cup, because we think that 2023 might well be a year of two halves. Why is that? Because we believe that in the first half of the year we might see equities – and risky assets more generally – on a global basis under pressure due to a challenging environment where the aggressive monetary policy tightening that we've been seeing will most likely lead to a gross domestic product (GDP) recession in the United States and in Europe. As we've been highlighting over our latest publications, a number of leading indicators are already pointing to that direction. Therefore, we believe that asset prices ought to incorporate these when we get there. 

However, at the same time, we think that we're going to have a much more constructive second half of the year. I don't want to be too precise here, but at some point, we're going to get a combination of a) central banks truly pivoting (i.e., they are going to stop hiking rates and the next move is going to be to ease and to cut policy rates). And at the same time, I think that throughout the entire year, China is going to be under a process of reopening its economy. So, these very tough mobility restrictions that we've seen implemented as a result of the second large wave of COVID in China that has been hindering economic activity, and getting in the way of an economic activity rebound in 2022, is unlikely to be in place in 2023.

We've seen large protests in Beijing, Shanghai, and other cities in China, that were most likely a very important moment. China’s central leadership is now really trying to move away from these really tough policies. Overnight, they've issued some 10 further points to the 20 points previously published about how to reopen the economy and how to make sure that the zero COVID-19 policy is implemented in a way that allows for much better mobility conditions.

It's going to be a complicated reopening process during the winter, but at some point during the spring, we think we're going to see an accelerated reopening. And again, that's most likely going to coincide with much lower asset price valuations as a result of the poor first half of the year, and most likely coinciding with a true pivot from policymakers both in the United States and in the rest of the world. 

On the back of that, as we've been saying over the last months, we think that investment grade assets in emerging markets (EM) are already presenting an opportunity and will provide relatively pretty decent returns for conservative investors in the first half of the year. 

However, at some point, investors might consider adding exposure to the high yield part of the asset class and to EM equities as well. Now, one caveat is that equity investors are very good at anticipating what's happening in the future. They might be much more sanguine about the outlook for China, and we might see a scenario where EM equities are outperforming the developed world equities, even in a negative environment for the first half of the year.

Therefore, a much more constructive picture emerges for EM assets in general. But it's one where we are still going to be favouring a more conservative allocation with the first half of the year, following by a much better environment in the second half of the year on the back of China easing, and again, the pivot by the US Federal Reserve (Fed). 

The third big question of 2023 is whether we're going to see a ceasefire or a frozen conflict in Ukraine. The Ukrainian conflict has been a key element of the outlook for any asset prices, to the extent that it has been adding a significant amount of pressure in energy markets and in food markets. That is going to have several consequences – intended and unintended – as a result of the sanctions that are still being unrolled and implemented in Ukraine. 

That is a very hard question to answer, in particular during the winter, as we don't think that either party has a very strong incentive to negotiate a ceasefire at this stage. Ukraine is going to keep trying to fight to recover territory, but it's going to be very hard to fight and take too much territory during a severe winter, which is looking more likely at the moment, particularly after the cold snap we've had in Europe over the last couple of weeks. 

Also, the Russians will have their point of maximum leverage against the west in the winter when their demand for energy is going to be higher. Therefore, they can again impose significant pain on the west via the energy sector. Also, Russia has been changing it tactics in Ukraine. Instead of trying to regain territory or control war territory, they've been focusing on (unfortunately) destroying the infrastructure of the country, which is going to impose a more significant cost. 

So, the war is a much harder scenario to forecast because there are significant moving parts. 

We talk about geopolitics throughout the 2023 outlook, both Ukraine and Russia but also China, Taiwan (particularly in relation to semiconductors), and Turkey. Turkey is going to have an interesting year in 2023, particularly with its general election. We also have general elections in Argentina, where we can have pivotal moments in terms of asset prices. So, there are many interesting events that we discuss at more length in the 2023 outlook. 

Stephen Rudman: Gustavo, thank you very much. I think that's very helpful. I do have one question: obviously, we have seen an improvement in markets over the last six weeks or so. Certainly, November was relatively positive for markets across the board. And with some of our clients and prospects, that has created cautious optimism. Based on what you just described, where would you think about starting with that cautious optimism in terms of asset allocation?

Gustavo Medeiros: I think that the very strong rally in November is clearly a relief rally in a bear market. And the narrative that allowed for the rally was one where the Fed would be pivoting its interest rate hike programme from 75 basis points to 50 basis points, and that is going to be enough to bring asset prices to much higher valuations. 

Now, relief rallies can be quite vicious, and in some parts of the asset class, specifically in US equities, I think the relief rally brought asset prices to a level of valuation completely incompatible with an economic recession. And that's why we start the year with a much more cautious tone, in line with what we've been hearing from some of your clients, Steve. This is because we think that the excessive tightening in monetary policy that we've seen in 2022 will have a significant impact on the economy in 2023. Therefore, we will need to see this process of economic recession leading to higher unemployment rates, which is going to lead to lower wage inflation and lower service sector inflation, allowing the Fed to truly pivot. 

Typically, equity markets are anticipating they're going to rally before the end of the recession. But during the middle of the recession, or the worst point of the recession, when everybody's very bearish and policymakers start panicking (i.e., really taking steps to ease monetary policy), that's when investors would want to add decisively into risk assets,  into equities and into the higher yield part of the asset class. 

In our 2023 outlook, we take a step back and try to point out to long-term investors even within the next 12 months we can see very favourable total return scenarios across the asset classes. But we just want to be mindful of the environment that we're still in, as we're likely to see more choppiness in risk assets before we can go, as we say, “off to the races” and just buy EM equities and EM high yield For now, we're in an environment where you need to still be very selective. Some high yield assets are very attractive, and we highlight that in the paper as well. Some parts of the equity market, Chinese equities in particular, can have a very different beta from the overall market. But you want to be still relatively cautious. Simply put, you don't want to buy equities ahead of a recession. That's rarely worked in history and the drawdowns can be quite significant if you buy equities a bit too early, especially after such a strong relief rally such as we've seen in November.

Stephen Rudman: Excellent, that’s helpful. I'll paraphrase that by saying buy on weakness, don't buy on strength. Thank you, Gustavo, and again, the full white paper is worth a read and will be attached to the document to which you've just received. As always, we would like to wish all of you a very happy holiday season. And as we say, till the next time.

Gustavo Medeiros: Thank you.