'Ahead of the curve in fighting inflation': Why these experts are betting on emerging markets in 2024

Maple-Brow Abbott says emerging markets ahead in the economic cycle should see capital flow in 2024
Weaker US dollar in 2024 could have an upside to emerging market companies focused on exports
Confidence could return to Chinese market in 2024, where valuations are within 10% of their 20-year lows

Thinking of investing in global emerging markets in 2024? Maple-Brown Abbott head of global emerging markets John Moorhead reckons several factors point to a stronger year for global emerging markets in 2024.

He says a likely peak in interest rates, attractive valuations and higher rates of economic growth should see capital flow to select emerging markets further ahead in the economic cycle.

“Emerging economies have generally been ahead of the curve in fighting inflation, helped by moving early with rate rises and maintaining fiscal discipline,” Moorhead says.

“That leaves many emerging market governments and central banks well placed to stimulate for growth.”

Moorhead says for example, Brazil was one of the first central banks globally to raise rates and is now in an easing cycle.

“With a balanced federal budget, still high real rates and a stock market trading around 8x forward earnings, we believe Brazilian equities are well placed for further gains,” he says.

“For the first time in close to two years, the broad emerging markets index is seeing a sustained lift in the outlook for earnings.

“At the bottom-up level, we are uncovering exciting opportunities in companies that are already reporting strong fundamentals.”

Weak US dollar will mean upside for emerging markets

ETF industry expert Kanish Chugh told Stockhead a forecasted weaker US dollar in 2024 could have an upside to emerging market currencies and in turn equities.
Chugh says currency has a big impact on a lot of emerging markets.

“A weak US dollar increases import costs but boosts exports as companies see their products priced more competitively,” he says.

Chugh says another understated benefit of a weaker US dollar is capital inflows and access to capital.

“Should the Fed’s rate policy soften and even reverse, emerging market economies and companies could start to attract more investments and find it easier to borrow more money to fuel growth,” he says.

“Historically we have seen a negative relationship between the US dollar and EM equities with EM equities gaining roughly 4% for each 1% of US dollar weakness.”

Don’t discount China in 2024

Equity markets in China and Hong Kong finished as the weakest among major global indices in 2023, suffering due to geopolitical tensions, a slow economic rebound, and uncertain policies.

The China CSI300 (CSI300) Index saw a decline of 11%, while Hong Kong’s Hang Seng Index (HIS) experienced a steeper fall of 14%.

Maple-Brown Abbott, head of Asia Will Main, believes Chinese equities remain a contrarian opportunity and confidence could return to the market in 2024, where valuations are within 10% of their 20-year lows.

“Three years of equity market declines have the left the market cheap, unloved and under-owned,”he says.

“From an equity market return perspective, experience tells us that things only need to be ‘less bad’ to see animal spirits kick in and stock prices move higher.

“We are optimistic on the outlook for China and believe there are a number of attractive opportunities for investors.”

Chugh says China has really struggled from Covid-19 in the past three or four years with extended shutdowns, a softening property market and a prolonged recovery along with geopolitical events.

“It has struggled to achieve the rebound we’ve seen with some of the Western nations out of Covid,” he says.

“In emerging markets you have two distinct types of companies, those that are very much focused on domestic markets and that’s where we’ve seen for example in India companies do very well just focusing on local consumption and growth.

“On the other side in China, we are seeing a greater focus on export driven companies, for a great example you’ve got BYD which has really shot up the ranks as a leading producer and seller of electric vehicles not just in China but globally.”

Chugh says present in 70 countries, BYD very focused on its international strategy and exported over 600,00 cars in 2023, eight times more than it did in 2020.

Geopolitical events may have impact

Moorhead believes political events in emerging markets may create idiosyncratic investing opportunities.

“Emerging markets face a busy election period over the coming 12 months,” he says.

“Taiwan, Indonesia, India, South Korea, India, South Africa and Mexico are all expected to hold elections before the end of 2024.

“In our experience in emerging markets, uncertainty arising from campaign policy announcements as well as the election results can create shorter term market volatility, which can result in longer-term investment opportunities.”

Chugh says we live in a world where countries are now very much dependant upon each other, so maintaining diplomacy is important.

“China will continue to some dependency upon Western nations for natural resources to come out of its slump, to rebuild and get going another infrastructure boom for example,” he says.

Think beyond China and India for emerging markets

Chugh says when we think of emerging markets many investors are focused on China and India.

“When you think of emerging markets you’ve got Brazil and South American countries,” he says.

“You’ve got countries that have really struggled economically and politically as well so I think you’ll find there are some interesting dynamics to play out beyond Asian markets.”

He says you’ve also got the Tiger Nations of Asia including Thailand, Vietnam, Indonesia which have driven a lot of emerging market growth.

“When you think of emerging markets it’s not just one or two countries,” he says.

“When you look at the portfolios of emerging market funds and indexes etc it is China predominantly but there are other countries which will also start to do very well.”

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The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead. Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.