How emerging-market equities’ rebound rally could extend throughout 2023

The magnitude of 2022’s EM equities decline was a harsh reminder of the asset class’s volatility; the MSCI Emerging Markets Index dropped 20.1%, its worst result since the 2008 global financial crisis. Yet some of the key headwinds that buffeted EM equities began to ease in late 2022, and we believe a modest market rebound that played out in the fourth quarter reflects an increasingly brighter outlook for the rest of 2023. We see several early-stage catalysts—including improving prospects in Mainland China and a more favorable macroeconomic backdrop for the information technology sector—that suggest strong potential for an EM equity recovery.

How emerging market equities' rebound rally could extend throughout 2023

An uneven path on the road to a potential recovery

Despite our overall positive outlook, we don’t expect a steady upward arc for emerging-market (EM) equities, given the potential for shifts in the forces currently driving global markets. After a difficult 2022 for all asset classes globally, we believe that 2023 GDP growth across developed markets (DM) is likely to weaken from 2022’s modest pace of economic expansion. In our view, the greatest uncertainty lies with the inflation outlook and the trajectory of declining inflationary pressures. As DM central banks continue to raise interest rates, we’re nevertheless mindful that the long-term structural drivers of inflation will continue to be fueled by supply chain shifts away from China, the protracted nature of Russia’s invasion of Ukraine, and the global push for decarbonization.

As for the United States’ influence on the EM outlook, one key source of uncertainty is how high the U.S. Federal Reserve (Fed) will lift its key benchmark lending rate before pausing its current cycle of monetary tightening. Another is the severity of a potential U.S. recession that many economists are expecting in 2023. A shallow recession will naturally create a relatively more constructive environment for equity markets to recover—particularly in EM, where there has been a historical correlation of strong EM equity performance following U.S. recessions. Should inflation dynamics be more benign than anticipated, a dovish pivot from the Fed is likely to create favorable conditions for quality growth equities.  

Each of the past four U.S. recessions has been followed by an EM bull market

MSCI Emerging Markets Index price levels, January 1988–December 2022

Source: Bloomberg, National Bureau of Economic Research, January 2023. The MSCI Emerging Markets (EM) Index tracks the performance of publicly traded large- and mid-cap emerging-market stocks. It is not possible to invest directly in an index. Recession periods indicated are as defined by the National Bureau of Economic Research. Bull markets shown are periods of market appreciation of at least 20% following either a recession or a market low point 20% below a recent high. Past performance does not guarantee future results.

Why we see a brighter 2023 in China

One of the major catalysts that contributed to an improved EM equity outlook was the Chinese government’s December 2022 lifting of restrictive COVID-19 rules that had slowed economic growth. While we don’t believe that recovery will be smooth, we believe that this long-awaited policy shift will provide a catalyst throughout 2023 as pent-up consumer demand plays out. Furthermore, it’s not the only significant tailwind that we see for the Chinese equity market, which is the largest country component in the MSCI Emerging Markets Index, with a 32.3% weighting as of December 31, 2022. Among the other tailwinds:

· Regulatory easing—In the wake of a government crackdown on Chinese internet companies, two important events have occurred. First, the nation’s online gaming regulator approved a slew of new domestic games in December and January. Those actions and subsequent approvals of imported foreign games appear to signal an end to the crackdown on the video games industry. Second, the government has signaled that Ant Financial, China’s largest payments platform, is now able to access capital markets after a 2½ year hiatus that marked the beginning of the regulatory crackdown on the sector.

· Monetary policy support—We expect the People’s Bank of China, the country’s central bank, will be more proactive and use appropriate liquidity tools to support the real economy. We also believe policy banks will take a more active role and provide greater support to the property market, which underwent instability in 2022, including falling residential and commercial real estate prices and credit stress.

· Low equity valuations—We believe that valuations remain low across several Chinese equity sectors owing to the amount of pessimism and elevated market risk premium that had been applied to Chinese assets. On the back of low valuations and an improving earnings outlook, we believe Chinese assets currently offer attractive opportunities.


Recovery potential in technology    

In addition to China, information technology continues to be a sector where we see an abundance of EM equity opportunities in the wake of 2022’s dislocations. Top of mind for us are select high-quality technology companies that we view as long-term champions for innovation. Many of these companies—notably some economically sensitive firms in South Korea and Taiwan—endured an especially challenging 2022 owing to their vulnerability to softened demand for consumer electronics and to macro headwinds such as the strengthening of the U.S. dollar amid rising interest rates. We believe that recent easing of inflation and a potential shift away from currently restrictive monetary policies are likely to offer a more favorable backdrop for these companies through the rest of 2023, potentially leading to earnings reacceleration.

The strengths and weaknesses that 2022 revealed

Amid 2022’s many headwinds, it was of paramount importance for companies to demonstrate visible earnings growth, profit margin resilience, and the ability to optimize operational efficiency and profitability. In early 2023, we believe that many EM companies have emerged more resilient, as many have consolidated their strengths and are focused on improving their efficiency and profitability. We’re continuing to concentrate on businesses with solid balance sheets, resilient cash flow, and other sources of financial strength that could enable them to gain market share. Some of the businesses that we view favorably have recently been cutting costs while others continued to invest in technology, hardware, and research and development to advance their leading market positions.

A brighter EM outlook

Although we witnessed rapid dislocation in 2022, we transitioned into 2023 mindful of the opportunities that volatility can create for active managers seeking to identify great companies with attractive valuations. Over the long term, we believe that a stock’s market valuation is likely to ultimately trend to its fundamental intrinsic value. Despite today’s challenging EM environment, we nevertheless see plenty of early-stage tailwinds, and we view valuations across several EMs as compelling on both shorter- and longer-term metrics. Against this backdrop, we’ll continue to adhere to an investment framework focused on identifying high-quality, compounding-growth businesses while applying detailed due diligence. 

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. 

All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients and prospects should seek professional advice for their particular situation. Neither Manulife Investment Management, nor any of its affiliates or representatives (collectively “Manulife Investment Management”) is providing tax, investment or legal advice. 

This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information. 

Manulife Investment Management shall not assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment approach, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation doesn’t guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.


A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment. 

This material has not been reviewed by, and is not registered with, any securities or other regulatory authority, and may, where appropriate, be distributed by Manulife Investment Management and its subsidiaries and affiliates, which includes the John Hancock Investment Management brand.

Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license. 


Kathryn Langridge

Kathryn Langridge, 

Senior Portfolio Manager, Emerging Markets Equity

Manulife Investment Management

Read bio
Philip Ehrmann

Philip Ehrmann, 

Former Senior Portfolio Manager, Emerging Markets Equity

Manulife Investment Management

Read bio
Talib Saifee

Talib Saifee, 

Portfolio Manager, Emerging Markets Equity

Manulife Investment Management

Read bio