By Alastair Reynolds

We expect individual emerging market countries and sectors to display divergent paths in 2023, as has proven to be the case so far in 2022. This will be most obvious in terms of monetary policy with Brazil, for example, being about 12 months ahead of developed countries in its interest rate cycle. Brazil should soon be exiting from peak interest rates while other countries may see continued rate rises into 2023.

India looks set to deliver the strongest growth amongst the large economies, fueled by strong domestic demand. China, too, should see a recovery in domestic growth and this could be enhanced by any loosening of its zero-COVID policy.

Technology-focused economies such as Korea and Taiwan are expected to see earnings declines as technology supply chains are entering a period of de-stocking. Despite a wide variance in individual performance, share prices have responded rationally to what have been significant changes in investment conditions at both country and sector levels.

We will enter 2023 with emerging market stocks trading on close to 10x their price-earnings (P/E) ratios – well below the average of the past decade. This reflects expectations of slowing global growth as the effects of higher interest rates start to weigh on consumption.

Corporate earnings growth is likely to be lower overall in 2023, following a strong recovery from the COVID pandemic in 2021 and 2022, as the commodity boom seen this year is unlikely to be repeated.

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Reflecting this, our portfolio positioning has remained broadly unchanged. We continue to find attractive investment opportunities across a broad range of countries and industries. Because our investment horizon focuses on the longer term, we remain excited by the powerful combination of technology adoption, urbanization and services sector growth that is evident in emerging markets.

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We expect our highly selective, stock-focused approach will prosper through accessing companies with a high return on equity that operate in structurally growing industries. As we enter 2023, we are more excited about opportunities within the small-cap asset class than we have been in more than a decade. The economy—as well as monetary and fiscal policy—are changing at a time when small-cap stocks look inexpensive on both an absolute and relative basis. Following more than 12 years of significant underperformance relative to large caps, we believe small caps are positioned for a long-term secular period of outperformance.

(Author is Emerging markets by Portfolio Manager, Martin Currie, a subsidiary of Franklin Templeton)