BofA emerging markets & global assets 2023 outlook

As emerging markets continue to rally since the end of last year, data from global investment firms like Bank of America backs this trend. David Hauner, Head of EEMEA Economics and Cross Asset Strategy at Bank of America, joined CNBC Africa to discuss the outlook for 2023. Hauner expressed optimism, stating they have been bullish on emerging markets (EM) since November and foresee more upside potential in EM equities, currencies, and local debt. He highlighted South Africa as a key interest for investors, anticipating further inflows into South African assets. However, Hauner cautioned that volatility and setbacks are expected along the way. The bullish case for EM stems from China's projected economic acceleration amidst a potential U.S. recession. This dynamic is crucial as it signifies the growth gap between China and the U.S., a significant indicator for emerging markets, is the most promising since 2011. Moreover, the undervaluation of EM assets, both equities, and bonds, in comparison to historical standards further supports the optimistic outlook. With the U.S. heading towards a recession and the Federal Reserve's extensive tightening, investors are increasingly looking beyond the United States for opportunities. Hauner emphasized that now is the time to 'buy the world,' translating to investments outside the U.S., with EMs being the primary beneficiary of this trend. South Africa, in particular, stands out due to its appealing attributes such as a liquid market, high yields, and historical foreign investor interest. Hauner projected hefty total returns of around 25% for dollar-based investors in South African local bonds by the year-end. Additionally, South African equities are attractive, especially with the anticipated reopening of China and the weakening dollar in 2023. The country's high-interest rates and the nearing end of rate cycles make it an opportune time for investors, particularly in rate-sensitive sectors like banks. Despite a short-term recommendation to short the rand, Hauner reiterated the long-term bullish view on South Africa and EMs in general. Transitioning to China's reopening and its implications, Hauner addressed concerns regarding inflation. He agreed with the prevailing sentiment that China's resurgence would exert upward pressure on inflation globally. The increased demand for metals and energy amid China's reopening is expected to hinder central banks from cutting rates in the second half of 2023. Hauner forecasted oil prices reaching $100 again and anticipated heightened competition for LNG between China and Europe. Contrary to market expectations, Hauner dismissed the possibility of the Fed cutting interest rates in late 2023, citing the persistent nature of inflation. He warned of potential volatility in the spring or summer arising from these factors, with the U.S. equity market presenting a notable risk for EM assets. In conclusion, Bank of America's outlook for emerging markets in 2023 remains optimistic, contingent upon China's resilience, inflation developments, and a cautious approach to market volatility.