2022 was not a kind year for the broader emerging market complex. The iShares MSCI Emerging Markets ETF (EEM) has dropped 22% year to date. That puts the fund on pace for its biggest one-year loss since 2008, when it tumbled 50%. Three key drivers of this underperformance were steep declines in economic activity in China due to the country’s zero-Covid policy, a strong dollar and higher interest rates around the world. Looking ahead, strategists and some widely followed investors on Wall Street see a better year ahead for emerging markets, especially as China starts to unwind its strict Covid protocols and the dollar eases off its highs. “We’re going to have a spending boom in China, at least in the first half of the year,” said Mehran Nakhjavani, emerging market strategist at MRB Partners. “This means that, with a market already exposed heavily to consumer earnings … there’s going to be really good support for Chinese stocks,” which will boost emerging market equities more broadly. China reopening Earlier this month, the Chinese government implemented sharp changes to its Covid policies, allowing domestic travel and quarantines at home in a move to keep businesses running. Among the changes, people will no longer need a negative Covid test to travel to a different part of the country. Local authorities have also removed many testing requirements. The changes from Beijing came just a few weeks after protests erupted across China over the country’s strict Covid controls . Demonstrators clashed with authorities in several major cities, including Shanghai and Beijing, after 10 deaths in a building fire in Urumqi, Xinjiang in late November was blamed on the old quarantine policy. “When you look at the recent events of the past few weeks, it’s pretty clear that zero-Covid is out the window. It’s over,” Nakhjavani said. Now, China will “tolerate very high levels of infection.” Nakhjavani isn’t the only one who sees China reopening as a positive catalyst for emerging markets. JPMorgan chief global markets strategist Marko Kolanovic said in a Dec. 8 note that he sees emerging market stocks returning 14% to investors in 2023 , citing the potential for strong economic growth in China as the country reopens for part of the bounce. The iShares MSCI China ETF (MCHI) has dropped 26% in 2022, on pace for its worst year on record. Meanwhile, the Shanghai Composite is down 15%, headed for its biggest one-year loss since 2018 — when it shed 24.6%. The dollar Another catalyst that could drive gains in emerging markets is a potential decline in the dollar. A weaker dollar tends to boost emerging markets as debt in U.S. dollars becomes easier to service. The U.S. dollar has been on fire …….
