Written by Charles Walsh, portfolio manager, emerging market equities at Mirabaud Asset Management
1. What are the key opportunities you see in your market going into 2024?
The turn of the year is often seen as a time of fresh starts and new opportunities. For emerging market (EM) equities, 2024 could well deliver much of what was predicted ─ but failed to materialise ─ for 2023. 12 months ago, a China-led recovery was rapidly priced in by the market, only to unwind when the pace of recovery disappointed. But now, more supporting factors are in place.
As a reminder, historical precedent suggests that when EM growth is outpacing developed market (DM) growth, and DM isn’t undergoing a deep recession, EM equities tend to outperform. This norm didn’t play out in 2023 largely because, whilst EM GDP growth outpaced DM, this failed to translate into a broad-based corporate earnings upcycle. The anticipated earnings recovery was delayed by various factors including China’s property woes, weak consumer sentiment and destocking within the tech supply chain. We’re now seeing concerted attempts to support the Chinese property sector, as well as restore consumer confidence. At the same time, household savings are at historical highs.
Additionally, a fresh consumer tech replacement cycle also looks set to coincide with inventories back at normalised levels. All of which present the potential for a recovery in the corporate earnings cycle.
Another point of historical significance is that the period immediately after peak US rates normally sees EM equities outperform DM equities, partly thanks to the tailwind of a gradually weakening US dollar. If the US experiences a relatively soft landing, as currently expected, that should also protect the more export-reliant nations within EM from the issue of weaker demand. A goldilocks scenario in the US of lower inflation, robust employment and a resilient consumer at the same time as falling interest rates is one of the most favourable economic environments for EM equities.
Lower interest rates globally in 2024 also pave the way for EM rates to come down in support of economic growth. EM nations including Brazil, Chile and Poland have already begun their cutting cycles ─ a sign that inflation pressures have been dealt with more quickly than in DM. This creates the opportunity to support EM businesses and consumers with lower lending rates, which provides further momentum for a new corporate earnings upcycle.
2. What surprises could 2024 bring?
Stepping into 2024 after a challenging time for the asset class, we have many reasons to be optimistic. We’re heading into a global environment of lower rates, a weaker US dollar but robust employment and a healthy global consumer. At the same time, we have normalising inventories, a replacement cycle in technology and the beginnings of a new corporate earnings cycle. Taken together, 2024 could surprise us as the year 2023 first promised to be.
