Monetary tightening has also helped underpin local currencies, as a high pickup in real bond yields compared to developed markets has attracted capital over the past several months. At present, the real yield differential in six large EM economies (Brazil, Indonesia, India, Mexico, Poland, and South Africa) is roughly five percent. <\/p>\n\n\n\n
A commodities supercycle? \u2014<\/strong> Commodity prices have staged a remarkable recovery since mid-2020, benefiting from the reopening of economies after the pandemic and from increased demand for critical industrial minerals needed for the clean energy transition. Price gains were also extended due to the Russo-Ukrainian war, which deprived markets of two important suppliers. As a result, prices for both industrial metals and the agricultural complex are much above recent averages. Given rapidly growing demand and the difficulty of ramping up supply quickly, there is increasing talk of a commodities supercycle. <\/p>\n\n\n\n Line chart showing the Commodity Research Bureau Index, an index of industrial and agricultural commodities, over the past 5 years. The index is a representative indicator of global commodities markets. The index slumped when COVID-19 struck but gained rapidly and exceeded previous levels as economies reopened. The Russo-Ukrainian war caused a peak in prices. They have receded since, but remain above their 5-year average of 479. <\/p> Note: CRBI is an index of industrial and agricultural commodities <\/p> Source – RBC Wealth Management, Bloomberg; data through 5\/12\/23 <\/p> <\/div> <\/div>\n\n\n\n Many EM countries are generously endowed with natural resources, so their economies are tightly linked to commodity prices. Resource stocks represent some 15 percent of overall EM market capitalization, according to our national research correspondent, and therefore EM equities tend to benefit from rising commodity prices. <\/p>\n\n\n\n Improving growth differential \u2014<\/strong> Overall, consensus has upgraded 2023 economic growth forecasts for EM economies, even as DM forecasts have been downgraded. <\/p>\n\n\n\n During 2023, outlook upgrades for Asian countries which benefit from China\u2019s reopening and for some Middle Eastern countries have more than offset downgrades in Latin America, Eastern Europe, and Africa. As DM economic growth prospects dimmed due to banking woes, EM countries\u2019 economic growth differential relative to developed markets improved. Historically, when EM growth exceeds DM growth, EM equities tend to be well supported, according to our national research correspondent. <\/p>\n\n\n\n Consensus estimates now call for EM GDP growth to reach 4.2 percent in 2023, up from 3.1 percent early this year, while DM GDP growth expectations have been pulled back to 0.9 percent from 2.6 percent. <\/p>\n\n\n\n Source – RBC Wealth Management, Bloomberg; data as of 5\/15\/23 <\/p>\n\n\n\n EM corporate earnings forecasts have been similarly revised upward, again in contrast to DM forecasts which have been downgraded. MSCI now expects EM earnings to grow by 2.1 percent in 2023, in contrast to the 2.7 percent contraction expected at the beginning of the year; 2024 earnings expectations have improved to 17.4 percent from 13.7 percent over the same period. <\/p>\n\n\n\n These developments bode well for the asset class, but in our view they bear close monitoring as cyclical considerations may be coming back to the fore. <\/p>\n\n\n\n Monetary orthodoxy has its cost \u2014<\/strong> Interest rates are in the double digits in several countries, including Hungary, Egypt, and some Latin American states. This is not sustainable, particularly where economies or companies are highly indebted. Mark Dowding, chief investment officer at RBC BlueBay Asset Management LLP, points out that stress is building in some fringe emerging markets and a number have had to restructure debt, including Zambia and Ghana. He believes more restructurings could be in the offing as weaker economies struggle with a \u201ctoxic mix of elevated debt levels, plus higher U.S. rates.\u201d With many countries holding national debt in U.S. dollars, the 500 basis point (bps) interest rate increase has proven particularly painful. <\/p>\n\n\n\n Eric Lascelles, chief economist at RBC Global Asset Management Inc., notes that from the point of view of an EM fixed income investor, the situation is not alarming because the countries which have defaulted and those under duress (i.e., where the spread of local bonds to U.S. bonds is greater than 1000 bps) represent less than three percent of EM market capitalization. <\/p>\n\n\n\n Polina Kurdyavko, head of EM at RBC BlueBay, believes that emerging market policymakers have gained a lot of credibility by staying on the front foot during the interest rate hiking cycle. She opines, however, that the challenge now is to transition from a stance of tight monetary policy and relatively loose fiscal policy, adopted to counter the effects of the COVID-19 pandemic and the Russo-Ukrainian conflict, to more dovish monetary policy and more conservative budgets. Execution, she says, will be key. <\/p>\n\n\n\nCommodity prices remain above their 5-year average<\/h3>\n\n\n\n
![\"Commodity](\"https:\/\/www.rbcwealthmanagement.com\/en-us\/wp-content\/uploads\/sites\/7\/2023\/05\/emerging-markets-may-2023-en-chart-1.png\")
GDP growth forecast changes<\/h3>\n\n\n\n
Emerging markets (EM) vs. developed markets (DM)<\/h4>\n\n\n\n
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\n \n<\/th>\n January forecast<\/th>\n May forecast<\/th>\n<\/tr>\n<\/thead>\n \n Consensus EM GDP growth<\/td>\n 3.1%<\/td>\n 4.2%<\/td>\n<\/tr>\n \n Consensus DM GDP growth<\/td>\n 2.6%<\/td>\n 0.9%<\/td>\n<\/tr>\n \n EM\/DM growth differential<\/td>\n 0.5%<\/td>\n 3.3%<\/td>\n<\/tr>\n<\/tbody>\n<\/table><\/div>\n\n\n\n Will EM continue to attract inflows?<\/h2>\n\n\n\n