Will emerging markets come back?
“We expect 2024 to be the year in which emerging market profits finally lift off from 0% growth, and we expect modest outperformance,” Maasry says. In short, he believes that rising earnings growth, not low valuations, will prove the key to a comeback in emerging markets.
After a difficult year in 2023, we're seeing signs that a recovery may be brewing for emerging-market (EM) equities. For investors to regain confidence, it's important to revisit some common assumptions about EM stocks with a critical eye. It's easy to understand why investors are struggling to warm to EM.
As EM countries continue to improve policy, we believe a return of investors—and inflows—should build in 2024, attracting at least half of the money that left the asset class over the last couple of years.
We continue to see GDP growth around 4.0% for global emerging markets in 2024, led by growth around 5.0% for emerging Asia. We anticipate growth in a range of 2.0%–2.5% for emerging Europe and Latin America, though our recent U.S. growth upgrade could signal positive implications for Mexico and all of Latin America.
We expect growth in EMs will diverge significantly in 2024, moderating for many countries that outperformed in 2023 and slightly increasing for some countries that underperformed.
Based on current market conditions, we believe the best markets to invest in right now are emerging markets like India, Brazil, and Saudi Arabia, and Bitcoin. Below, we'll explore what's driving each of these markets and what makes them such strong opportunities for investment.
Vanguard's active fixed income team believes emerging markets (EM) bonds could outperform much of the rest of the fixed income market in 2024 because of the likelihood of declining global interest rates, the current yield premium over U.S. investment-grade bonds, and a longer duration profile than U.S. high yield.
Emerging markets may have unstable, even volatile, governments. Political unrest can cause serious consequences to the economy and investors. Economic risk. These markets may often suffer from insufficient labor and raw materials, high inflation or deflation, unregulated markets and unsound monetary policies.
Even though the world economy at large has proven resilient, they point out that portfolio flows to emerging markets have experienced the most pronounced decline in more than a decade - driven mainly by outflows from Russia and China - and they have now been trending down for ten years.
If a US recession is on the way would only make more of a case for greater diversification in global portfolios – a positive for emerging markets. A recession would entail lower inflation and, as a result, lower US interest rates.
How much should I put in emerging markets?
In short, a review of the three standard approaches to EM allocation suggest global equity investors should allocate somewhere in the range of 13% to 39% to EM. Source: FactSet, MSCI, MSIM calculations.
Wall Street analysts ultimately expect S&P 500 companies to grow earnings by roughly 11% in 2024. And by the fourth quarter, growth is expected to have roughly evened out, with the top 10 stocks expected to see growth of 17.2% while the other 490 companies see growth of 17.8%, according to FactSet data.
Over the course of the projections, Goldman Sachs Research expects EMs' share of global market cap will rise to around 35% by 2030 (50% for GDP), to 47% by 2050 (60% for GDP), and to 55% by 2075 (68% for GDP).
Lack of Liquidity
Emerging markets are generally less liquid than those found in developed economies. This market imperfection results in higher broker fees and an increased level of price uncertainty.
With emerging markets, it's a good idea to consider a fund or exchange-traded fund (ETF) to gain broad exposure rather than picking one or two developing economies. It's always wise to talk to a regulated financial adviser before investing to develop an investment strategy and ensure a diversified portfolio.
By sector, industrials, technology, financial services, and consumer defensive stocks look most overvalued. The most undervalued sectors heading into the second quarter are real estate, utilities, and communication services.
Consider EM bonds carefully
Among the opportunities in the fixed income markets in 2024, local-currency EM bonds may be one to consider for investors with a higher risk tolerance. The relatively high yields and likelihood of rate cuts by global central banks have created a tactical investment opportunity.
Free and fair competition is to be welcomed, but the pressure on companies to win big contracts in emerging markets has led to bribery, violations of OECD trade-financing agreements, and escalation of political pressure by home governments on those awarding contracts.
G20 emerging markets—especially, but not only, China—have continued to make their presence felt as an important source of global and regional spillovers.
In calendar year 2023, the U.S. economy grew faster than it did in 2022, even as inflation slowed. Economic growth is projected to slow in 2024 amid increased unemployment and lower inflation. CBO expects the Federal Reserve to respond by reducing interest rates, starting in the middle of the year.
Will 2024 be a bull or bear market?
Economic growth actually accelerated above its 10-year average in 2023. That resilience, coupled with a fascination about artificial intelligence (AI), changed investors' collective mood. The S&P 500 soared throughout the year and finally reached a new high in January 2024, making the new bull market official.
Meanwhile, the median streak of positive returns can extend to 17 months with a gain of 14%, based on historical data. That suggests the S&P 500 could trade to 6,000 by August 2025, and to as high as 6,150 by November 2025.
In essence, the U.S. has not been as expensive as perceived, and the rest of the world has not been as cheap. That may be the case again in 2024. Therefore, a strategy that includes U.S. and international stocks may continue to outperform one that excludes U.S. equities, even though non-U.S. markets appear cheaper.
“We expect 2024 to be the year in which emerging market profits finally lift off from 0% growth, and we expect modest outperformance,” Maasry says. In short, he believes that rising earnings growth, not low valuations, will prove the key to a comeback in emerging markets.
The Five Major Emerging Markets. Brazil, Russia, India, China, and South Africa are the biggest emerging markets in the world.
