In 2023, Emerging Market stocks had their best year since 2020 but still managed to lag the 22% advance of Developed Markets, mainly due to the drag from China.
As we step into 2024, the global market landscape presents a mix of evolving challenges and emerging opportunities. The U.S. market, known for its persistent price leadership, encountered a shift in 2023. We observed a subtle yet significant change in the earnings landscape, with U.S. forward earnings beginning to lag behind the rest of the world. We believe that this trend is likely to continue, bolstered by the euro area’s regaining economic momentum and a revival in global trade, which should particularly benefit Emerging Market earnings.
A sharp upswing in Emerging Market 12‐month forward earnings, especially notable outside China, suggests considerable upside potential. The stabilization, or at least a halt in the decline of Chinese earnings, marks a positive development for the broader EM spectrum.
From a valuation standpoint, Emerging Market equities continue to trade below their long‐term Price‐to‐Earnings (PE) averages. This valuation gap between Emerging Market and global equities is at one of its widest points in over two decades. The catalyst for narrowing this gap is likely to be the faster earnings growth in Emerging Markets relative to global equities.
Turning to commodities, they appear significantly undervalued and are poised for a rebound over a 6‐12 month horizon. This rebound is expected to be fueled by robust global growth and a weakening U.S. dollar, with oil, energy, and base metals likely to see relative benefits. This scenario bodes well for commodity‐rich nations like Brazil. Currency trends also suggest potential gains for Asian currencies and the Brazilian Real as growth in the euro area and Emerging Markets gathers pace.
Interest rates are another critical factor. Historical data shows that Emerging Market equities have, on average, surged by 14% in the 12 months following the initial rate cut by the Federal Reserve. This trend offers a compelling reason to maintain a positive outlook on Emerging Markets, especially if U.S. interest rates have peaked.
As for China, it’s more a case of a delayed recovery rather than a complete derailment. The focus for 2024 will be on the Chinese government’s policy measures, particularly those aimed at revitalizing the struggling property market and resolving local government debt issues.
In terms of regional specifics, EM ex‐China equities have demonstrated resilience amidst high global interest rates, thanks to a combination of reforms, domestic consumption, and solid balance sheets. India and Mexico, having implemented key reforms, are well‐positioned to attract foreign investment and boost capital expenditure. The upcoming election in India is likely to see the incumbent party retain power, which should further stabilize the reform trajectory. South Korea and Taiwan are set to benefit from an improving technology cycle, contributing significantly to EM earnings growth, which is projected to reach 18% in 2024.
China, while facing economic challenges, shows signs of bottoming out in growth. We see some strong opportunities in select China‐ based companies where fundamentals remain robust despite negative sentiment.
In summary, the outlook for emerging market equities in 2024 is positive, driven by a likely peak in U.S. interest rates, a recovery in earnings growth, and an improving economic landscape in China. While geopolitical tensions and other risks persist, we believe the fundamental factors will continue to fuel long‐term returns. Our strategy remains focused on capturing these growth potentials while staying vigilant to the evolving market dynamics.
December 2023
