Emerging-market stocks faced another challenging month as geopolitical risks and concerns over interest rate hikes continued to weigh on the appetite for riskier assets. Despite these broader market struggles, signs of economic stabilisation have been observed, particularly within the Chinese market.
Notably, the CESI economic surprise index for China moved above zero, signalling that recent economic data has been meeting or surpassing analyst expectations. This positive trend has been supported by a series of economic measures, including the approval of a substantial one trillion yuan (£137 billion) sovereign bond issuance aimed at bolstering the fourth-quarter fiscal framework. Moreover, local governments have been granted permission to accelerate their capital raising efforts for 2024, reflecting a proactive stance on economic planning.
To further stimulate the economy, the People’s Bank of China injected liquidity into the financial system, encouraging banks to extend more credit and keep interest rates low. This infusion of capital is anticipated to foster economic activity into the year’s end, offsetting some of the downturn pressures.
Across the emerging markets, regional equity indices reported downturns in October, with significant contractions seen across Asia, the Middle East, Africa, and Latin America. The dip in these markets reflects a broader trend of emerging-market stocks lagging behind their developed market counterparts, especially those in the United States. This has been a persistent pattern where the superior GDP growth in emerging markets has not been proportionately reflected in earnings growth, with gains often captured by global companies based in developed markets.
The dynamic of globalisation that intensified after China joined the WTO in 2001 appears to be shifting, as the world moves towards a more multipolar state with heightened trade and investment barriers, leading to more subdued global trade growth. This changing landscape suggests that moving forward, domestic emerging-market GDP growth may more accurately be mirrored in their earnings momentum.
Looking ahead, there is optimism that emerging-market earnings could see a notable recovery. China’s performance is surpassing negative growth forecasts, which supports the prospects for commodity exporters. Meanwhile, technological powerhouses like Korea and Taiwan are positioned to benefit from a resurgence in the semiconductor cycle, and countries like Brazil and India are seeing robust investment-led growth.
With emerging-market central banks poised to cut interest rates in contrast to their developed-market peers, coupled with attractive valuations and low investor engagement in emerging-market stocks, there is a conducive environment for potential outperformance of emerging-market equities in the medium term.