Looking to 2023, Emerging Markets and fixed income assets are forecasted to outperform, so what should investors pay close attention to in the new year? Head of FX and EM Strategy James Lord and Global Head of EM Sovereign Credit Strategy Simon Waever discuss.----- Transcript -----James Lord: Welcome to Thoughts on the Market. I'm James Lord, Morgan Stanley's Head of FX and EM Strategy. Simon Waever: And I'm Simon Waever, Global Head of EM Sovereign Credit Strategy. James Lord: And on this special episode of the podcast, we'll be discussing our 2023 outlook for global emerging markets and fixed income assets and what investors should pay close attention to next year. Simon Waever: It's Monday, December 12th, at 11 a.m. in New York. James Lord: A big theme from Morgan Stanley's year ahead outlook is the outperformance we're expecting to see from emerging markets. This isn't just about emerging market fixed income, though, which is what Simon and I focus on, but also equities. So across the board, we're expecting much brighter days ahead for EM assets. Simon Waever: And of course, the dollar is always key and it has been extremely strong this year. But what about next year? What do you think? James Lord: Yeah. So we are expecting the dollar to head down over 2023. In fact, it's already losing ground against a variety of G10 and EM currencies, and we're expecting this process to continue. So why do we think that? Well, there are a few key reasons. First, U.S. CPI should fall significantly over the next 12 months. This is because economic growth should slow as the rate hikes delivered this year by the U.S. Fed begin to bite. Supply chains are also finally normalizing as the world is getting back to normal following the pandemic. This should also help the Fed to stop hiking rates, and this has been a big reason for the dollar's rally this year. Simon Waever: Right. So that's in the U.S., but what about the rest of the world? And what about China specifically? James Lord: Yeah so, inflation is expected to fall across the whole world as well. And that is going to be a stepping stone towards a global economic recovery. Global economic recovery is usually something that helps to push the dollar down. So this is something that will be very helpful for our call. And third, we see growth outside of the U.S. doing better than the U.S. itself. This is something that will be led by China and other emerging markets. China is moving away from its zero-covid strategy and as they do so over the coming quarters, economic activity should rebound, benefiting a whole range of different economies, emerging markets included. So all of that points us in the direction of U.S. dollar weakness and EM currency strength over 2023. Simon, how does EM look from your part of the world? Simon Waever: Right, so away from effects, the main way to invest in EM fixed income are sovereign bonds and they can be either in local currency or hard currency. And the hard currency bond asset class is also known as EM sovereign credit, and these are bonds denominated in U.S. dollar or euro. We think sovereign credit will do very well in 2023 and we kept our bullish view that we've had since August. I would say external drivers were key this year in explaining why the asset class was down 27% at its worst. So that included hawkish global central banks, higher U.S. real yields, wider U.S. credit spreads and a stronger dollar. We think the same external factors will be key next year, but now they're going to be much more supportive as a lot of them reverses. James Lord: What about fundamentals, Simon? How are they looking in emerging markets? Simon Waever: Right. They do deserve a lot of focus themselves as well because after all, debt is very high across EM, far from all have access to financing and growth is not what it used to be. But they're also very dispersed across countries. For instance, you have the investment grade countries that despite not growing as high as they