Highlights:

• EM countries have faced multiple shocks year-to-date leading to dismal performances. EM  fragilities have increased, leaving frontier economies vulnerable to more defaults. However, large  EMs show sound fundamentals, and we do not expect systemic contagion. 
• Despite the shocks, EM growth has been surprisingly resilient, and the EM narrative is turning  more positive as the peak Fed Fund rate gets closer (1Q23). The latter will support a short-term  rally, though concerns could still shift to recession risks. 
• Historically, EM assets perform well after the Fed peak rate but US recession risk can drive  higher risk premium. That said, the reopening of China will boost EM manufacturing and to a lesser  extent commodity exporters' countries, thus attracting investors’ interest and supporting market  prices. 
• Across EM fixed income, EM rates will benefit the most into a Fed pivot (rate cut in 4Q23). We  will cautiously initiate receiver positions in LatAm front-end rates. For EM sovereign credit  performance, a strong positive duration effect and large carry will lead to positive total return  even if spreads can re-widen into the recession. We dislike European countries that should be the first to enter a recession, and where real rates are still deeply negative. 
• For EM equities, headwinds over the last year emanated from the global economic weakening, a  stronger US dollar, higher inflation, and tighter financial conditions. In the very short term,  such negative factors will partly linger. 
• By the end of Q1, we see higher chances for a better EM relative earnings momentum and expect the  dollar to continue consolidating. Both would contribute to the next outperformance cycle of EM  versus DM equities. Indeed, based on our historical analysis, EM equities seem to be well  positioned once the Fed Fund rate peak is past. Low valuations are an additional positive factor.  We see higher potential for China, India and Korea, whereas Brazil, Hong Kong, Mexico, and Saudi  Arabia are relatively less attractive. 
   

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