1. Latin America: Markets in Latin America have been the best performer in emerging markets (EMs) year-to-date, driven by the rise in the energy sector, which has posted double-digit returns. Looking ahead, Luiz Inácio Lula da Silva’s successful run for a third term as president of Brazil, in combination with his party’s lack of control of either House of Congress, imply that there are checks and balances in place to act as fiscal constraint. Additionally, recent reforms imply the risk of a repeat of past interference in the management of government-controlled companies has diminished. We remain positive on the outlook for equity markets in Brazil and Latin America.

2. Earnings: EMs have witnessed a sharp reduction in 2022 consensus earnings forecasts, which have declined from 6% growth in January 2022 to -11% at the end of October. China has been the primary drag on earnings over this period, but resilient earnings growth in Brazil, Mexico and Indonesia has been a partial offset. Focusing on 2023, EM earnings growth is forecast to witness a modest rebound to 3%, based on consensus forecasts; however, a large portion of this is reliant on the recovery in Chinese earnings, which is far from assured.

3. Interest rates: The size of interest rate increases globally is starting to slow, with the Bank of Canada opting for a 50 basis point increase in October over its previous strategy of 75 basis point increases at prior meetings. Other central banks may follow this move in the coming months amidst signs that earlier rate increases are starting to filter through to the economy and as the pace of energy price increases starts to slow. This should have positive implications for future inflation and signals we are closer to the end than the start of the rate tightening cycle. While rates are expected to nonetheless continue rising, markets are a discounting mechanism and may start to focus on the timing of the peak in the rate tightening cycle given the increasing risks of a recession in 2023.

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