Schroders: Emerging markets economic growth will be slower in 2022

Global investment firm Schroders has shared its market outlook for 2022, shedding light on the challenges and opportunities that lie ahead for emerging markets. In a recent interview with CNBC Africa, David Rees, Senior Emerging Markets Economist at Schroders, discussed the factors that could impact economic growth in the coming year. The discussion revolved around the dual threats of inflation and the Omicron variant of COVID-19 and their potential implications for markets. Rees highlighted the uncertainty surrounding the Omicron variant, emphasizing that investors are wary of the rapid spread of the virus and its potential impact on economic activity. He pointed out that early signs suggest Omicron is highly infectious, raising concerns about the effectiveness of vaccines and the possibility of increased restrictions that could dampen economic growth. Looking ahead to 2022, Rees identified inflation as a key risk for emerging markets. He noted that rising inflation levels in major economies have started to stifle demand, leading to challenges such as recessionary trends in countries like Brazil. While he expects inflation to eventually subside next year, the legacy of rate hikes could continue to weigh on economic activity, resulting in weaker growth prospects for emerging markets. Despite the headwinds, Rees also mentioned opportunities for investors in local markets, especially as growth is expected to roll over and inflation is projected to decline. He emphasized the importance of navigating foreign exchange markets on a case-by-case basis and highlighted potential investment opportunities in select currencies. When it comes to asset allocation, Rees shared that Schroders has been holding higher levels of cash due to concerns about market corrections and overpriced assets. He expressed caution regarding equities in emerging markets, citing uncertainties surrounding regulatory crackdowns in countries like China. This cautious approach has led Schroders to maintain an underweight position in emerging markets on the multi-asset side. In terms of currency outlook, Rees noted that the US dollar is expected to remain strong in the near term, which could pose challenges for emerging market currencies. While there are pockets of value in certain currencies, such as the South African rand and the Brazilian real, concerns about economic conditions and upcoming events like general elections have made investors hesitant to fully commit to these currencies. In conclusion, Schroders' assessment of the 2022 market outlook for emerging markets suggests a mixed landscape of challenges and opportunities. Navigating the uncertainties posed by inflation, the Omicron variant, and currency fluctuations will be crucial for investors looking to capitalize on potential growth in the coming year.