The outlook for emerging markets (EM) looks positive as the US Federal Reserve signals a move towards more accommodative monetary policy, amid other tailwinds.
In particular, economic fundamentals are much better than in previous years, investment executives say, and emerging countries are showing resilience and growth potential despite indications of hawkishness from central banks.
Earlier this month, the latest Oxford Economics hawkishness index for July, measuring the relative aggressiveness of central banks, found that emerging market hawkishness remains high, suggesting that many economies will likely be below their inflation targets.
“Prolonged hawkish monetary policy poses a significant risk to demand growth in emerging markets,” he said.
“In the short term, central banks may justify restrictive policies given slowing progress on disinflation and increased volatility in financial markets. But our real activity tracker reveals that activity has lost momentum in emerging markets with the highest hawkishness index.
It maintained its forecast for overall GDP growth in emerging countries at 4 percent for 2024, but revised downwards its forecast for 2025 to 3.9 percent. It also raised its key rate forecasts for most emerging countries in 2024 and 2025.
Offering country-specific insights, he points out that central banks in Mexico and the Philippines, among others, have cut rates amid signs of slowing growth. Meanwhile, Brazil and Malaysia are expected to keep their rates unchanged, noting a downside risk if inflation expectations do not decline.
Despite these mixed results, investors in emerging countries remain optimistic about the trajectory of these markets in the months to come.
According to Joseph Lai, chief investment officer at Ox Capital, the monetary policy of central banks in emerging countries has been “reasonable” in balancing inflation and economic growth.
While US Federal Reserve Chairman Jerome Powell indicated last week that “now is the time” to ease monetary policy, and that interest rate cuts are on the horizon in September, The outlook is bright for emerging market stocks, Lai said.
“Upcoming US rate cuts and a weaker US dollar are very positive for emerging markets and EM stocks have historically performed well during US rate cut cycles,” he said. he declared.
Economies like India, Indonesia and Vietnam are thriving despite slowdowns in other markets like China and the United States, Lai noted, and emerging market valuations are generally attractive, trading at current levels. /profit and price/accounting valuation the lowest in several decades.
This is important given that emerging market stocks have historically outperformed developed markets over the long term.
“A lack of mainstream interest has led to extraordinarily attractive valuations,” he said.
“We see an attractive entry point with forward price-to-earnings ratios at depressed levels for quality companies with sustainable long-term growth and a favorable backdrop for outperformance.”
Moreover, this trend will only benefit from the rapid decline of high interest rates in these economies.
“For example, Indonesian banks experience robust growth, minimal credit issues, generate high returns on equity, trade at attractive price-to-book ratios, and offer dividend yields of up to 6-7 percent,” Lai said.
Samuel Bentley, client portfolio manager at Eastspring Investments, also suggested that some emerging market central banks were likely to cut interest rates in tandem with the Fed’s cut, particularly as domestic inflation stabilizes and slowdown in the economy.
Over the next 12 months, as a cycle of monetary easing overlaps with the U.S. election cycle, he forecasts reduced uncertainty, lower interest rates and a weaker U.S. dollar that will structurally support U.S. stocks. emerging countries.
Emerging market stocks could even perform on par with U.S. stocks, albeit with high volatility, in the second half of 2024, Bentley observed.
Like Lai, he also pointed to reasonably cheap valuations in emerging markets, which could prove advantageous. He particularly highlighted Latin America, where the company sees many valuation opportunities, particularly Brazil and Mexico, as well as South Korea and China, where market pessimism continues to price in extreme results. .
“Historically weak investor positioning in emerging markets and very favorable relative valuations mean that, if there are no clear headwinds, cheap valuation itself could generate much stronger emerging market performance “Bentley said.
“Emerging market stocks trade at a cheap price of at least one standard deviation from historical averages, while U.S. stocks are more expensive than a standard.”
