Economy

NEW DELHI/SYDNEY/NEW YORK (Reuters) – Moody’s (NYSE:MCO) downgraded on Friday the ratings outlook for some Adani Group companies, while MSCI said it would cut the weightings of some in its stock indexes, the latest blows for the Indian conglomerate plunged into crisis by a short-seller’s report.New York-based short-seller Hindenburg Research accused the Adani Group in a Jan. 24 report of stock manipulation and improper use of offshore tax havens that it said obscured the extent of Adani family stock ownership in group firms. The conglomerate, which has denied any wrongdoing, has since seen $110 billion wiped off the value of its seven listed firms.The crisis has sparked worries of financial contagion in India and protests in parliament where lawmakers have demanded an investigation. It has also put the spotlight on the dwindling fortunes of 60-year-old billionaire founder Gautam Adani, who was forced to shelve a $2.5 billion stock offering amid the market meltdown.On Friday, Moody’s downgraded its ratings outlook to negative from stable for Adani Green Energy; the Adani Green Energy Restricted Group, which represents some of its other units; and two subsidiaries of Adani Transmission. “These rating actions follow the significant and rapid decline in the market equity values of the Adani Group companies following the recent release of a report from a short-seller highlighting governance concerns in the group,” Moody’s said.MSCI reassessed the size of some Adani companies’ free floats, having determined there was “sufficient uncertainty” surrounding some investors in Adani companies. It embarked on the review after feedback from market participants. In another index action, the S&P BSE IPO index will drop Adani Wilmar, the conglomerate’s consumer goods company, as part of its monthly review, according to a statement from S&P and the Bombay Stock Exchange, which did not explain the rationale behind the move. Shares in the flagship Adani Enterprises closed down 4% on Friday after dropping 11% the previous day, when MSCI flagged the changes. Adani Transmission and Adani Total Gas slid 5% on Friday, while ACC lost 2%. Also on Friday, India’s Supreme Court heard petitions raising concerns about steep investor losses sparked by Hindenburg report’s, and said investors needed to be protected.”The point of concern here is how (to) … protect the interest of investors,” Chief Justice of India, D Y Chandrachud, said. The stock market “is also a place where investment is made by a wide spectrum of middle class,” he added, asking market regulator SEBI to submit the existing regulatory frameworks to the court and explain how investor interests can be safeguarded in future.The court’s remarks come as regulatory scrutiny is increasing on the Adani Group.Reuters reported on Friday, citing sources, that SEBI is investigating Adani Group’s links to some of the investors in the conglomerate’s aborted $2.5 billion share sale.MSCI said that, in addition to the group’s flagship firm Adani Enterprises, it planned to cut index weightings for Adani Total Gas – a venture with France’s TotalEnergies – and Adani Transmission, a power transmission company.It will also reduce the weighting of ACC, a major Indian cement company acquired from Switzerland’s Holcim (SIX:HOLN) last year but which is not one of the Adani group’s main seven listed firms. The four companies had a combined weighting of 0.4% in the MSCI emerging markets index as of Jan. 30. “The lower free float will require passive investors to sell stock to reduce their tracking error with the index,” said Brian Freitas, a Periscope Analytics analyst who publishes on Smartkarma.He estimated there would be around $570 million to sell by passive funds across Adani Enterprises, Adani Total Gas and Adani Transmission on Feb. 28.The changes on MSCI indexes take effect on March 1.Hindenburg founder Nathan Anderson has said MSCI’s review was “validation of our findings”. Adani Group did not respond to a request for comment from Reuters on Friday. (Graphic: Adani Enterprises’ shares plunge after Hindenburg report Adani Enterprises’ shares plunge after Hindenburg report, https://www.reuters.com/graphics/ADANI-INDIA/gdpzqdamwvw/chart.png) More

LONDON/SINGAPORE (Reuters) – Japanese markets reacted with shock on Friday to news that the government had picked academic Kazuo Ueda to be the next central bank governor, but investors quickly snapped up the yen and sold bonds on expectations he will end years of super-easy monetary policy.Whether, when and how the Bank of Japan adjusts its policy stance is one of the major questions facing markets globally this year, and, in a sign of uncertainty about Ueda’s own view, the yen gave back some of its gains after he expressed support for the central bank’s current position.The yen jumped more than 1% and hit 129.8 per dollar after reports from Japan’s Nikkei, Reuters and others that the government will nominate Ueda, a former member of the central bank’s policy board, as the Bank of Japan’s next governor.While Ueda is considered an expert on monetary policy, most analysts said the appointment of the 71-year-old was totally unexpected — he was not even considered a dark horse candidate — and could signal a move to phase out ultra-low interest rates sooner than initially expected.Japanese government bonds (JGBs) fell, with 10-year yields hitting the 0.5% top end of a policy band that is the crux of incumbent Governor Haruhiko Kuroda’s trademark yield-curve-control policy.10 year JGB futures ticked back up a little in the evening in Tokyo and the yen lost some ground to trade around 131 per dollar after Ueda said in comments streamed online by Nippon TV that the central bank’s current easy monetary policy was appropriate and that it should continue.   GRAPHIC: The BOJ’s YCC faces a reckoning (https://www.reuters.com/graphics/JAPAN-ECONOMY/BOJ/zjvqjwdaqpx/chart.jpg) The surprise news left investors and analysts trying to parse Ueda’s recent commentary. “He’s been not terribly positive on Abenomics from the start. From about 2016, he was saying that it had basically failed and the super large monetary easing was causing problems with the bond market, and these sorts of things,” said James Malcolm, UBS’s London-based head of currency strategy.”I’m surprised that dollar yen is not 129 already. Maybe that’s just a result of people not knowing who these characters are.”Some analysts thought markets were merely reacting to the fact that Deputy Governor Masayoshi Amamiya, who was until Friday viewed as the lead contender for the top job and had helped frame its ultra-loose policy, hadn’t been picked.”There is probably a lack of clarity on Ueda’s policy leanings at the moment, but at least it is clear that Amamiya (who is seen as a dove) is out. That removes one of the headwinds for the yen,” said Christopher Wong, currency strategist at OCBC in Singapore.”The knee-jerk reaction in yen appreciation is more of a reaction to Amamiya being out of the race.”As per government sources, Ryozo Himino, former head of Japan’s banking watchdog, and BOJ executive Shinichi Uchida are being nominated as deputy governors – implying a major change of guard at the BOJ by the time Kuroda steps down in April.The nominations need approval by both houses of parliament, which is a near certainty given the ruling coalition’s solid majority.NEW LOOK, NEW POLICYFor some market participants, the new faces at the BOJ hinted at the need for change in an establishment that has struggled to distance itself from the controversial yield control policy without reputational damage.The BOJ’s increasingly large bond-buying operations have sapped bond markets of liquidity and distorted the yield curve.”This is a surprise move. I think the new team means that they will redesign the BOJ’s monetary policy, not maintain the current policy,” said Takayuki Miyajima, a senior economist at Sony (NYSE:SONY) Financial Group in Tokyo. “That is why the 10-year JGB yield hit 0.5%.”Still, analysts pointed to some of Ueda’s comments in the past that were seen as inconclusive about his leanings: his urge for caution in raising rates, his views that the Federal Reserve had been late with policy tightening in 2022 and his concern for the impact of inflation on Japan’s giant pension fund.”The apparent choice for governor now – Ueda – is somewhat of a wild card for the markets,” said Stuart Cole, head macro economist at Equiti Capital.”So we could yet be in for a volatile ride in the yen if he turns out to be singing from the same hymn sheet as Kuroda.” More

GRAPHIC: Fund flows: Global equities bonds and money market (https://fingfx.thomsonreuters.com/gfx/mkt/lbpggbymjpq/Fund%20flows-%20Global%20equities%20bonds%20and%20money%20market.jpg) The dollar index gained about 1.1% last week, with the stellar January U.S. payrolls report prompting investors to price in the risk of more hikes from the Fed. U.S. equity funds recorded outflows of $470 million, although investors purchased European and Asian funds of about $100 million each. According to the data, healthcare, consumer staples and energy sectors faced outflows worth a net $1.23 billion, $501 million and $306 million, respectively, while financials received about $952 million in inflows. GRAPHIC: Fund flows: Global equity sector funds (https://fingfx.thomsonreuters.com/gfx/mkt/lgpdkngqxvo/Fund%20flows-%20Global%20equity%20sector%20funds.jpg) Meanwhile, investors remained net buyers in bond funds for a sixth week, but the buying dipped to $4.52 billion, the smallest amount since Dec. 28. Global short- and medium-term bond funds remained in demand for a third week as they received a net $2.38 billion. Still, investors exited $2.27 billion worth of government bond funds, marking their biggest weekly net selling since at least March 2021. GRAPHIC: Global bond fund flows in the week ended Feb 8 (https://fingfx.thomsonreuters.com/gfx/mkt/klvygdljjvg/Global%20bond%20fund%20flows%20in%20the%20week%20ended%20Feb%208.jpg) Global money market funds recorded outflows of $4.47 billion compared with the previous week’s $1.12 billion net purchases. Among commodity funds, investors poured $447 million into energy funds in a second straight week of net buying, while precious metal funds obtained a net $100 million after witnessing a weekly outflow. Data for 24,697 emerging market (EM) funds showed equity funds secured a net $2.74 billion in a fifth successive week of net buying, while bond funds obtained a net $1.3 billion worth of inflows. GRAPHIC: Fund flows: EM equities and bonds (https://fingfx.thomsonreuters.com/gfx/mkt/egvbyaebqpq/Fund%20flows-%20EM%20equities%20and%20bonds.jpg) More

TOKYO (Reuters) – Japan’s ticking debt time bomb will likely complicate the next central bank governor’s task of steering a smooth exit from ultra-loose monetary settings, with rising long-term interest rates already forcing policymakers to amend budget projections.Prime Minister Fumio Kishida’s administration has nominated Kazuo Ueda, a former member of the central bank’s policy board, as its pick to succeed Bank of Japan (BOJ) Governor Haruhiko Kuroda, people familiar with the matter told Reuters on Friday.Kuroda retires on April 8 and leaves behind a policy that helped keep the cost of funding the country’s huge debt pile extremely low.Ueda’s nomination, if confirmed, would come as the BOJ faces growing pressure to phase out yield curve control (YCC) with inflation running hot and its heavy-handed intervention criticised for distorting bond market pricing.The stakes are high.A flurry of big spending packages and ballooning social welfare costs for a rapidly ageing population have left Japan with a debt pile 263% the size of its economy – double the ratio for the United States and the highest among major economies.(Graphic: Japan’s rising debt pile complicates BOJ’s exit path Japan’s rising debt pile complicates BOJ’s exit path, https://www.reuters.com/graphics/JAPAN-ECONOMY/BOJ-DEBT/byprlknbqpe/chart.png)As a result, Japan spent 22% of its annual budget on debt redemption and interest payment last year, more than the 15% spent on public works, education and defense combined.The ratio could hit 25% in fiscal 2025 under new estimates that reflect recent rises in long-term interest rates, according to the government’s projections issued in January.And yet, the government’s spending wish list keeps getting longer with Kishida announcing plans to boost Japan’s defense spending and payouts to families with children.”The BOJ must gradually normalise monetary policy. But that won’t be possible unless wages rise and Japan’s fiscal policy is made more sustainable,” said Yuri Okina, head of a private think tank.Markets see Ueda as somewhat hawkish on monetary policy, drawing on his remarks in recent years offering a critical view of Kuroda’s radical stimulus programme.In an opinion piece in the Nikkei last July, Ueda said the BOJ must consider an exit strategy from ultra-loose monetary policy and review its extraordinary stimulus programme at some point.Japan’s precarious debt situation has drawn warnings from the International Monetary Fund, which said last month that “interest rates could increase suddenly, and sovereign stress could emerge” from its rising debt-to-GDP ratio.While the government’s “very comfortable” funding situation will be sustained as any BOJ rate hike will be gradual, Japan was facing a “very risky time” managing debt, said Christian de Guzman, senior vice president at Moody’s (NYSE:MCO) Investors Service.”We are looking to see how (the BOJ) manages the transition. It is an unprecedented situation.”S&P Global (NYSE:SPGI) Ratings warns a future rate hike could affect Japan’s sovereign debt rating if firms, many of whom are accustomed to prolonged ultra-low rates, struggle to absorb rising funding costs.”Even a 1-2 percentage point (rise in interest rates) is very big in Japan’s context. I’m not sure how well the service sector could absorb this increase,” Kim Eng Tan, senior director of S&P’s sovereign ratings team in Asia-Pacific, told Reuters.PAYING THE PRICEEven before the BOJ takes any action towards an exit, rising bond yields are starting to affect the government’s finances.Last year, market bets of a near-term rate hike drove up the benchmark 10-year bond yield by 40 basis points to hit a high of 0.48% by year-end. Last month, the yield briefly hit 0.545%, the highest level since June 2015 and above the BOJ’s 0.5% cap.The increase in long-term rates led the government to revise up its 10-year bond yield forecast to 1.5% for fiscal 2025, up from 1.3% in projections made a year ago, and project the yield to rise to 1.6% in 2026.Based on the new estimates, a 1% across-the-curve rise in yields will increase debt servicing costs by 3.6 trillion yen in fiscal 2026. That is no small rise for a country with an annual defence spending of 5.4 trillion yen.The forecasts, used in drafting the budget, are set higher than market levels to ensure government spending plans have buffers against an abrupt spike in borrowing costs. Before YCC, the government’s yield estimates hovered around 1.6 to 2.2%.With inflation – not deflation – becoming a bigger risk for Japan’s economy, Kishida’s administration is more open than his predecessors to the idea of a gradual BOJ policy normalisation, say government officials with knowledge of the matter.But it will be sensitive to any BOJ action that upends the bond market and hampers government spending plans, they say.That means any Japan’s debt situation will be among key considerations for the BOJ as it eyes an eventual lift-off.”While it’s better for market forces to drive bond moves more, removing the BOJ’s yield cap could destabilise markets and make investors cautious of buying bonds,” one official said.”That’s a scenario we’d like the BOJ to avoid.”Former finance ministry official Kazumasa Oguro, who is now an academic at Japan’s Hosei University, warns the government will pay the price for delaying fiscal reforms during time bought by the BOJ’s yield control policy.”The BOJ is gradually being cornered into normalising policy,” he said. “In the end, market forces will prevail.” More

Jamaica is admittedly not the biggest economic story of the past decade, but some parts of the FT Alphaville empire (cough, the Oslo outpost at least) reckon that it is at the very least one of the most intriguing.A few years ago FTAV ran a chunky two-part investigation into how Jamaica found itself circling the economic drain in 2013 — after spending over half its time as an independent country in various IMF programmes — but by 2019 had managed an improbable escape and impressive recovery. Unfortunately, Covid-19 brutalised Jamaica right after that, hammering the country’s open, tourism-dependent economy and threatening to undo a decade’s worth of hard work. Russia’s invasion of Ukraine has been another hit, lifting inflation and further blowing out Jamaica’s current account deficit. So it’s heartening to see the latest assessment of the IMF and its executive board, which landed in our inbox yesterday. With our emphasis:Over the past few years, Jamaica has been buffeted by a difficult global environment — from COVID, the war in Ukraine, and the ongoing tightening of global financial conditions. Supported by sound policy frameworks and policies prioritizing macroeconomic stability, the economy is now recovering strongly. As COVID waned, stopover flight arrivals had rebounded to pre-crisis levels, and 2022 real GDP growth is expected to be around 4 percent. Pushed by global factors — in particular, the impact of the war in Ukraine on commodity prices — inflation has risen above the central bank’s target band but is expected to decline during the course of 2023. High commodity prices have resulted in an increase in the current account deficit. However, international reserves remain at healthy levels. The financial system is well-capitalized and liquid.The outlook points to a continued recovery in activity and inflation falling back within the Bank of Jamaica’s target range by end-2023. Nonetheless, global risks remain high. The war in Ukraine may push commodity prices higher, a stronger-than-envisaged tightening of global financial conditions may curb capital flows and reduce remittances, and new COVID variants could disrupt tourism and trade. The authorities’ response to recent shocks has been well designed. The fiscal policy response to COVID was nimble, supporting the economy in 2020 but then quickly resuming a downward path for the debt as the impact of the pandemic faded. Similarly, the response to the upward surge in fuel and food prices was to allow for full pass-through while providing targeted support to the poor within the existing fiscal envelope. The Bank of Jamaica has followed a data dependent tightening of monetary policy to counter the inflationary impulse arising from the rapid recovery in demand and increases in global prices. These policies have struck the right balance in responding to shocks, protecting the vulnerable, countering inflationary pressures, and further securing debt sustainability.This was echoed by the IMF’s board, which reviewed the Fund’s recent Article 4 report on Jamaica:Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities’ strong track record of building institutions and prioritizing macroeconomic stability, which together with a nimble and prudent policy response helped Jamaica navigate successfully the pandemic and other recent global shocks.This is as close as the IMF comes to a standing ovation. Just take a look at how Jamaica’s debt-to-GDP ratio has gone from a peak of 147 per cent in 2013 — one of the highest in the world, and WILDLY high for a small, poor country — to about 86 per cent at the end of last year.And that’s after it spiked back above 100 per cent in 2020 after Covid-19 hammered Jamaica. By 2025 the IMF predicts it will fall to about 71 per cent. Still high, but almost half where it was just a decade ago. And this is not just about brutal austerity. Although tight fiscal policy has undoubtedly been a headwind to growth (the primary budget surplus is currently about 6.8 per cent, and was about 7.5 per cent for much of the past decade), the economy is now rebounding and unemployment falling again. The Jamaican jobless rate fell to a record low of 7.7 per cent in 2019, before the pandemic the lifted it above 10 per cent again. The latest release from the Statistical Institute of Jamaica indicates that the unemployment rate declined to a new record low of 6.6 per cent last July.There aren’t many happy economy stories out there right now, and Jamaica’s isn’t without its blemishes either. The unemployment rate for younger Jamaicans remains high, at 16.7 per cent, and the economy is still some distance away from recovering back to its pre-pandemic level, after a 10 per cent contraction in 2020. And even before then, it was struggling to discover a faster gear despite a flurry of reforms designed to improve Jamaica’s growth potential.But compared to where the country was a decade ago — when even Jamaica’s finance minister warned that the “survival of the Jamaican nation as a viable nation state” was at stake — this is as close to a miracle you’re ever likely to see. More

Japan’s prime minister Fumio Kishida is likely to nominate as the next central bank governor Kazuo Ueda, a respected monetary policy expert who has previously warned against an early exit from Japan’s ultra-loose stance.Two people with knowledge of the discussions said the government was expected to nominate the 71-year-old former Bank of Japan board member and professor at Kyoritsu Women’s University next week. His appointment would end weeks of speculation among global investors over the successor to Haruhiko Kuroda, who is due to step down in April after overseeing a decade of policies designed to keep interest rates at ultra-low levels by buying vast quantities of government bonds. In response to questions from reporters, Ueda declined to comment on whether he was approached by the government for the job. But he said: “The BoJ’s current monetary policy is appropriate. For now, I think it is necessary to continue easing measures.”Kishida is also expected to nominate Ryozo Himino, former commissioner of the Financial Services Agency, and Shinichi Uchida, a BoJ executive who has played a central role in shaping Japan’s monetary policy, as deputy governors, according to Japanese media.The yen briefly strengthened against the US dollar, rising more than 1 per cent to ¥129.81 before reversing course as markets digested the implications of the government’s choice. The yield on 10-year Japanese government bonds rose 1 basis point higher to reach 0.5 per cent — the upper limit of the band within which the BoJ attempts to control their movement.Analysts said the selection of Ueda would signal a desire to appoint a technocrat who would base the BoJ’s monetary policy decisions on economic rationale rather than politics. Masayoshi Amamiya, the BoJ’s deputy governor and its chief monetary strategist, was previously considered the top candidate to succeed Kuroda. “Mr Ueda was the most dovish member when he served on the BoJ board” between 1998 and 2005, said Kazuo Momma, a former head of monetary policy at the BoJ who is now executive economist at Mizuho Research Institute. “He is a committed deflation fighter and he is unlikely to take a sudden hawkish decision that would shock markets.” In an interview in July with Nikkei, which initially reported the news of Ueda’s nomination, Ueda cautioned the BoJ against prematurely tightening its monetary policy. But he added that it would need to review its “unprecedented” easing framework at some point in the future: “There is a need for the BoJ to prepare an exit strategy.”But a former top executive of one of Japan’s largest financial institutions and an acquaintance of Ueda noted that while the academic had been critical of Kuroda’s monetary policy, his critiques were “very scholarly and economics-oriented”.In December, Kuroda surprised markets with a tweak to the central bank’s policy of controlling yields on the 10-year JGBs.That abrupt shift prompted investors to challenge the BoJ’s assertion that it was not tightening its policy, causing government borrowing costs to surge and forcing policymakers to carry out record bond purchases to maintain its new ceiling. Benjamin Shatil, foreign currency strategist at JPMorgan, said markets would take some time to work out how Ueda — if confirmed — would differ in his policy biases from Kuroda.

“Any initial market moves may prove to be a flash in the pan as traders turn their attention back to the incoming data from Japan which is showing record wage growth and persistent price pressures,” Shatil added.One person close to Ueda said the former Tokyo University professor, many of whose students were now senior bureaucrats at the BoJ and finance ministry, had been an important voice on monetary policy during the 1990s when Japan was a pioneer in quantitative easing.“He is thoughtful, he does not shoot from the hip,” the person said. “He is not someone that will be looking for big, quick wins.” More

Is it time to go back into emerging markets? Institutional investors certainly think so. They have poured money into emerging market stocks and bonds at a near-record rate this year.With the IMF predicting that the global economy is likely to do better in 2023 than it thought even a few months ago, emerging market bulls say this could be a good moment to look again at developing economies and their hopes of catching up with the industrialised world.But the bears wonder if it is really the right time to return to markets that are less predictable than most, at a time of considerable geopolitical uncertainty.The question is particularly tricky for retail investors who may lack the resources properly to research markets that are often remote and opaque. “We feel there is value in seeking out the better value countries and regions in emerging markets — but you have to go in with your eyes open,” says Mark Preskett, senior portfolio manager at investment management and research firm Morningstar. “It’s very easy to get it wrong and for a country to stay out of favour for years.” Too often, emerging market assets are buffeted by global storms that neither governments nor corporate executives can do much about. But for savers who can ride those waves and stay invested in a diversified portfolio for the long term, the returns can be rewarding.FT Money takes a look at whether readers should dive in or keep their feet firmly on the shore.Varied and volatileIf evidence was needed that emerging markets are volatile, last year delivered it in bucketfuls. For the first nine months of the year, foreign investors — mostly big institutions such as pension funds, banks and insurers — fled emerging market stocks and bonds on a scale never before seen in the history of the asset class — not since western investment managers made their first significant inroads in the 1980s. But in October everything changed and investors flooded back in. Since early 2023, the benchmark MSCI Emerging Market equities index has been trading 20 per cent or more above last year’s low — meaning it is back in a bull market.Does this volatility reinforce the message to retail investors that they should stay away? Or is this upswing a sign of a sustained recovery offering even those investors who buy now plenty of profit? Even after the recovery, EM equities are still about 30 per cent below their peak in February 2021.Preskett at Morningstar says retail investors should take a cautiously positive view. “We would see emerging markets almost as a core asset class, where your weighting depends on your attitude to risk.”Many retail investors, he notes, will already be exposed to emerging markets through funds that track global equity indices. The widely followed MSCI All Country World Index, for example, has about 11 per cent of its weight in emerging market stocks, including 3 per cent in China alone. (Some would say those weightings should be larger: China’s weighting is less than that of either Apple, at 3.7 per cent, or Microsoft, at just over 3 per cent.)Yet, José Mazoy, global chief investment officer at Santander Asset Management, says private investors should take great care in venturing any further, and “only make investments that fit their risk profile”. Emphasising that his concerns extend beyond emerging markets to the overall outlook, he adds: “In the context of globally diversified portfolios, we remain generally cautious on equities.”Prospective buyers should bear in mind that, given the extra volatility, EM forecasts can go wrong far more spectacularly than mainstream market predictions.High rates hit hopesJust 12 months ago, many analysts expected 2022 to be a good year for the asset class, as coronavirus lockdowns and travel restrictions were lifted.Russia’s full-on invasion of Ukraine changed all that, even though some commodity exporters temporarily benefited from sharply rising prices. Even they were hit soon after by the effects of rising global inflation, climbing interest rates and a strengthening US dollar. Few analysts anywhere had expected the yield on benchmark 10-year US Treasuries to more than double from less than 2 per cent in February to more than 4 per cent by October.High US rates and a strong dollar are anathema for emerging market investors. As the rewards offered by safe-looking assets such as US Treasury bonds rise, and the dollar appreciates, investing in emerging markets looks less appealing. Nor were Ukraine or the dollar/rates combination the only factors in a difficult year. Paul Greer, portfolio manager for EM fixed income at Fidelity International, says the “absolute nadir” came in October with “the whole episode of fiscal chaos in the UK” under shortlived prime minister Liz Truss, combined with the Communist party congress in China, which suggested that president Xi Jinping would stick with his hardline zero-Covid policies.UK fiscal turmoil matters to EM assets because it bears on investors’ willingness to take risks, especially for the many fund managers based in the UK.China’s zero-Covid policies — and China’s economy more broadly — matter much more. Since it joined the World Trade Organization in December 2001, China’s fast-growing economy, with its soaring demand for materials and manufactured goods from other developing countries, has been another big driver of EM performance.But China’s growth, running at more than 10 per cent a year in the early 2000s, slowed to less than 6 per cent in 2019 and just 2.2 per cent in the first pandemic year of 2020.Growth rebounded to 8 per cent in 2021 but then Xi’s zero-Covid policies sent it tumbling again to 3.2 per cent last year. The IMF does not expect much of a bounce back — it forecasts growth of less than 5 per cent a year for the next four years.Not surprisingly, the MSCI China dollar-denominated equity index lost almost two-thirds of its value between mid February 2021 and the end of October 2022. This was bad for emerging market equities more broadly, with Chinese stocks making up a third of the MSCI Emerging Markets benchmark index.But soon after last October’s nadir, Truss quit and Xi delivered a 180-degree U-turn. At the same time, signs began to emerge that global inflation could be near its peak and that the US Federal Reserve would soon slow the pace of its interest rate rises.Investors sensed an opportunity and jumped on it. Chinese stocks rallied, recovering a third of their losses, and lifted the MSCI Emerging Markets index as investors poured in.

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A sustained recovery?So what next? Jahangir Azia, an analyst at JPMorgan, says there is “a lot of gas in the tank” for further funds inflows given that interest rates, the dollar and the Chinese economy are all now moving in EMs’ favour.Moreover, after some time in the doldrums, emerging economies are once again set to grow faster than the advanced world. JPMorgan economists expect GDP in emerging markets to grow by 1.4 percentage points more than the rate in advanced economies this year, up from zero in the second half of 2022.The IMF’s latest revisions give EMs a further boost. It says that while the pace of GDP growth in advanced economies will slow this year, emerging and developing economies turned the corner last year and will grow by an average of 4 per cent this year and 4.2 per cent in 2024, up from 3.9 per cent in 2022. That compares with just 1.2 per cent in advanced economies this year and 1.4 per cent in 2024, down from an estimated 2.7 per cent in 2022.The prospect of accelerating growth in emerging markets is a welcome change for EM assets. Ever since the 2008 global financial crisis, many emerging economies have struggled to replicate their strong pre-crisis growth.On top of this, a clear slow down in the prolonged surge in investment into US tech stocks means risk-on investors are looking for alternative growth opportunities. “I firmly believe there is only so much investment capital to go around and it has all been channelled into US growth stocks,” says Preskett at Morningstar. “If we do get a change in this perceived exceptionalism of US growth stocks, capital might start flowing the other way and be attracted to emerging markets.”For EM bulls, it’s a heady mix of positives: falling inflation and interest rates; a weaker US dollar; a recovery of growth in China and, by extension, in other emerging economies, and large amounts of investment capital looking for a new home.But if they do rise, not all emerging markets will rise together. The days when the Brics — Brazil, Russia, India, China and South Africa — were expected to drive global growth and investment returns in lockstep are long gone. Russia has self-destructed as an investment prospect. South Africa has failed to live up to its promise. Other EM groupings — Civets, Eagles or Mints, anyone? — have come and gone as countries have increasingly followed more diverse economic paths.Under Morningstar’s projections for the next 10 years, the countries with the highest expected equity market annual returns are all in emerging markets: Brazil (12.9 per cent), China (11.1 per cent) and South Korea (10.4 per cent), with the highest projected returns in developed markets in fourth-placed Germany, at 9.6 per cent. By comparison, Morningstar expects the UK to return 7.8 per cent and the US, 3.5 per cent.Also, some EM equity valuations are low, offering a good entry point — as long as they then recover. For example, Brazilian equities are at about 7.3 times forward earnings, well below their 10-year average of 11.3 times. But would-be investors should note that after their recent surge, Chinese stocks are not so cheap — the FTSE China equity index trades at about 10.7 times projected forward earnings, just below the 10-year average of 11.2, according to S&P Capital IQ. Greer at Fidelity International says: “It will be a bit more incremental from here on. We may have seen the lion’s share of the rally in this cycle.”As always in emerging markets, expect volatility. None of the factors in their favour is permanent. Unexpected shocks may come, as they did, in dramatic fashion, last year.In Preskett’s view, most retail investors have yet to be convinced, despite the recent market recovery and the favourable prospects. “This is a very unloved rally,” he says. And it is easy to see why. “If you read the headlines, you should be staying away.” More

China has cut its participation in an internet cable project to link Asia with Europe, as tensions grow between Washington and Beijing over control of the physical infrastructure that transmits the world’s online traffic. Two of China’s biggest telecoms groups, China Telecom and China Mobile, withdrew their combined investment of roughly 20 per cent from the subsea cable project last year after a US company was selected to build the line over Hengtong Marine, the country’s biggest provider in the sector, according to three people briefed on the decision. Their exit from the Sea-Me-We 6 pipeline — which is estimated to cost around $500mn to lay 19,200km of cables connecting south-east Asia to western Europe — highlights the growing battle between China and the US over who builds and owns the infrastructure underpinning the global internet. The departure of China Mobile and China Telecom is an indication of intensifying tensions between Washington and Beijing, according to industry figures with knowledge of the project. Another member of the consortium described their involvement as “important but not critical”.China Unicom, a much smaller state-owned company, has remained involved with an unspecified investment in the project, which is expected to complete in 2025. Since 2020, the US has denied permission for several subsea telecoms cables that involved Chinese companies or directly connected the US to mainland China or Hong Kong, citing national security concerns.

The strained Sino-US relationship is reshaping the global technology sector, as companies and countries are forced to respond to the pressure exerted by the two economic powerhouses. Last October, Washington unveiled tough export controls to prevent China obtaining advanced chips or securing the technology and equipment to make high-end semiconductors domestically. The Sea-Me-We 6 consortium, which includes Microsoft, Orange and Telecom Egypt, opted for US company SubCom to build the line rather than the bid from Hengtong Marine — prompting the two Chinese state-owned groups to exit, the people said.While Sea-Me-We-6 is not the world’s largest international cable, it is similar in length to the Peace cable, laid exclusively by Chinese companies, which spans 21,500km and connects Singapore to France.Around 95 per cent of all intercontinental internet traffic — data, video calls, instant messages, emails — is transmitted via more than 400 active submarine cables that extend for 1.4mn km. The infrastructure has come under scrutiny amid global concerns around espionage, because the stations where cables land are seen as vulnerable to interception by governments, hackers and thieves. Several western security experts said China’s recent data security law — which mandates that domestic companies and institutions share data with the government if the information in question pertains to matters of national security — suggests that data operated by Chinese companies could be vulnerable to state interception.Alexandra Seymour, an associate fellow of technology and national security at the Center for a New American Security, said China’s ambition to own subsea cables through its three state-owned telecoms companies “raises a lot of espionage concerns” because it gives the government the tools to direct data traffic. “There’s just a lot of different ways that data can be compromised”, from espionage to software hacking to physical cable damage, added Seymour.

Some telecom industry experts fear that heightened suspicions fostered by both superpowers could lead to a decoupling of the internet’s infrastructure, with US companies increasingly building the pipes connecting allied nations, while China invests in those connecting much of Asia and Africa.Some argue this stems from Chinese and Russian efforts to build domestic internet infrastructure that is more suited to surveillance and is therefore incompatible with the decentralised model developed in the US and used around the world today. “The risk of fragmentation, I do think that’s big,” said April Herlevi, an expert in China’s foreign economic policy at the Center for Naval Analyses. “You’ve got China and Russia that have particular views on how the internet should be monitored and what role that plays, which is very different from sort of traditional western thought.”SubCom, Microsoft and Orange declined to comment. China Telecom and China Mobile did not respond to a request for comment.Additional reporting by Qianer Liu in Hong KongFollow Anna Gross on Twitter More