Emerging markets equities lag behind developed markets in Q2 2023 – Dailynewsegypt

Better-than-expected economic data and stable banking system in the US

The Q2 2023 Market and Strategy Report by Mashreq Capital states that the United States has alleviated concerns of a “hard landing” or financial crisis due to better-than-expected economic data and a stable banking system. This positive economic data has resulted in higher US Treasury yields during the second quarter of 2023.

Developed market fixed income

In developed market fixed income, the higher US Treasury yield was offset by spread compression of corporate credits as recession fears diminished. High-yield bonds outperformed investment-grade bonds, and sovereign bond yields increased in other major developed economies, primarily driven by higher-than-expected inflation readings in the UK and Australia.

Emerging market fixed income

Emerging market fixed income performed well against higher Treasury rates in the second quarter, with positive returns as spreads over Treasury bonds narrowed. High-yield bonds also outperformed investment grade, supported by positive developments in weaker-rated sovereigns like Egypt, Nigeria, and Turkey. JP Morgan’s Emerging Market sovereign and corporate bond index saw gains of 4.09% and 3.64% respectively during the quarter.

GCC bonds lag behind emerging markets

GCC bonds lagged behind the broader emerging market (EM) space in the second quarter of 2023 as investors shifted their focus to select distressed EM sectors that were showing a solid recovery. However, the JPMorgan GCC Index still posted a positive return of 0.41% for the quarter and 2.18% year-to-date, buoyed by robust fiscal health and decreased financing needs within the region.

Heightened investor appetite for credit risk

Investor appetite for credit risk increased in regions like North Africa and Turkey, driven by a series of favorable developments. However, the report acknowledges the persisting volatility in US Treasury yields due to tight labor market conditions in the US. Growth is expected to decelerate towards the end of the year, potentially leading to a rally in US dollar bonds in Q4 2023.

Tight EM US dollar bond spreads

The report highlights that EM US dollar bond spreads are tight by historical standards, suggesting that any positive return would likely come from compression in US Treasury yields. The divergence in monetary policies between developed and emerging markets is expected to become more pronounced, with the US tightening further while some EM central banks lean towards cuts, likely to accelerate once the US pauses.

Equity markets and central bank policies

Developed markets outpace Emerging Markets

The equity markets remained highly focused on central bank policy actions, with developed markets, especially the US, significantly outpacing Emerging Markets. The S&P500 Index returned 8.74%, the Nasdaq 100 Index returned 15.39%, and the Euro Stoxx 50 Index posted a return of 4.25%. In contrast, the MSCI Emerging Markets Index posted a modest total return of 0.97%. The SPACPUX Index recorded a total return of 3.92% for the quarter.

Strength of developed markets

Developed markets showed strength during the quarter, with the Nasdaq 100 Index posting one of the highest total returns for the first six months of the year, up 39.35% on a total return basis. The Euro Stoxx 50 Index was up 19.18%, and the S&P500 Index recorded a 16.88% return. These numbers have pushed valuations for developed markets above historical averages, moderating prospects for medium-term returns over the next 3-5 years.

Lagging performance of Emerging Markets equities

Emerging Markets (EM) equities lagged significantly behind developed markets, with a return of just 5.02% for the first six months of the year. However, EM equities appear slightly cheap compared to historical averages, as measured by the MSCI Emerging Markets Index.

MENA equities impacted by OPEC+ production cuts

In the MENA region, equities experienced a turnaround in the second quarter, rising 3.92% and finishing the first half of the year up 2.42%. Saudi Arabia led the way with a 9.13% increase, while Dubai rose 12.49% due to Gulf Navigation’s performance. However, Qatar fell by 1.04%, and Abu Dhabi rose by just 0.94%. Aggressive production cuts by OPEC+, led by Saudi Arabia, have impacted MENA equities, with concerns about global economic growth keeping oil prices in check.

Future outlook and considerations

Impact of US economic activity on developed market equities

Developed market equities have remained firm due to the resilience of US economic activity. Inflation remains high in most developed market economies, with only the US running a positive real rate based on core inflation. If other developed markets cool in line with the US without shifting to positive or at least zero real rates, it will be interesting to see how this affects equity market performance.

Conservative stance for emerging market equities

Emerging market equities are slightly cheap compared to history but are unlikely to remain firm if developed market equities weaken. Therefore, a generally conservative stance is advisable for investors with a medium to long-term horizon.

MENA equities and dollar bull region

MENA equities are influenced by aggressive production cuts by OPEC+ and concerns about global economic growth. However, as a dollar bull region, MENA is expected to outperform the broader Emerging Markets. Active fund managers remain underweight in the core EM markets in the region, which is seen as a structural medium-term tailwind. Therefore, there is a preference for bottom-up domestic demand and infrastructure plays in the favored markets.

SDGs, Targets, and Indicators

1. SDG 8: Decent Work and Economic Growth

   • Target 8.1: Sustain per capita economic growth in accordance with national circumstances and, in particular, at least 7% GDP growth per annum in the least developed countries.
   • Indicator: GDP growth rate

2. SDG 10: Reduced Inequalities

   • Target 10.1: By 2030, progressively achieve and sustain income growth of the bottom 40% of the population at a rate higher than the national average.
   • Indicator: Income growth rate of the bottom 40% of the population

3. SDG 12: Responsible Consumption and Production

   • Target 12.2: By 2030, achieve the sustainable management and efficient use of natural resources.
   • Indicator: Natural resource use efficiency

4. SDG 16: Peace, Justice, and Strong Institutions

   • Target 16.5: Substantially reduce corruption and bribery in all their forms.
   • Indicator: Corruption perception index

Table: SDGs, Targets, and Indicators

Analysis

1. Which SDGs are addressed or connected to the issues highlighted in the article?

The issues highlighted in the article are connected to SDG 8 (Decent Work and Economic Growth), SDG 10 (Reduced Inequalities), SDG 12 (Responsible Consumption and Production), and SDG 16 (Peace, Justice, and Strong Institutions).

2. What specific targets under those SDGs can be identified based on the article’s content?

Based on the article’s content, the specific targets identified are:

– Target 8.1: Sustain per capita economic growth in accordance with national circumstances and, in particular, at least 7% GDP growth per annum in the least developed countries.

– Target 10.1: By 2030, progressively achieve and sustain income growth of the bottom 40% of the population at a rate higher than the national average.

– Target 12.2: By 2030, achieve the sustainable management and efficient use of natural resources.

– Target 16.5: Substantially reduce corruption and bribery in all their forms.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

Yes, there are indicators mentioned or implied in the article that can be used to measure progress towards the identified targets. The indicators are:

– GDP growth rate: This indicator can measure progress towards Target 8.1 (sustaining per capita economic growth).

– Income growth rate of the bottom 40% of the population: This indicator can measure progress towards Target 10.1 (achieving income growth for the bottom 40% of the population).

– Natural resource use efficiency: This indicator can measure progress towards Target 12.2 (achieving sustainable management and efficient use of natural resources).

– Corruption perception index: This indicator can measure progress towards Target 16.5 (reducing corruption and bribery).

The article mentions economic data, higher US Treasury yields, inflation readings, and fiscal health as factors that can be used to assess progress towards these targets.

4. Table: SDGs, Targets, and Indicators

Behold! This splendid article springs forth from the wellspring of knowledge, shaped by a wondrous proprietary AI technology that delved into a vast ocean of data, illuminating the path towards the Sustainable Development Goals. Remember that all rights are reserved by SDG Investors LLC, empowering us to champion progress together.

Source: dailynewsegypt.com

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