Three things we are thinking about today:
- We are constructive on equity markets in 2024. Drivers include consensus expectations for a recovery in earnings growth,1the likelihood of a soft economic landing in the United States, and evidence that interest rates have peaked. Over the past 30 years, emerging market equities have on average risen 14% in the 12 months following the first Federal Reserve (Fed) rate cut.2
- In 2024, more than four billion people will take part in elections, starting with Taiwan in January and culminating with the United States in November. Voters will also go to the polls in India, Indonesia and Mexico, as well as in other countries. The Indian election in April-May is expected to see the incumbent Bharatiya Janata Party (BJP) party returned to power, as the benefits from widespread reforms continue to cascade down to households and companies.
- Consensus expectations call for a recovery in global earnings growth in 2024.3 Emerging market earnings growth is expected to accelerate to 18% in the year ahead, driven by South Korea and Taiwan.4 This represents a sharp recovery from the contraction in 2023. Price-to-earnings (PE) valuations for emerging market equities remain below their long-term averages. On a relative basis, the PE gap between emerging market and global equities is close to its highest level in over 20 years.5 Faster earnings growth in emerging markets relative to global equities may act as the catalyst to reverse the valuation discount.
Outlook
We remain positive on emerging market (EM) equities in 2024. Drivers for EM equities in the new year include the likelihood that US interest rates have peaked, a recovery in earnings growth, and the economic outlook in China, which appears to be past the worst.
EM ex-China equities have shown resilience in the face of elevated global interest rates, partly due to reforms, domestic consumption and healthy balance sheets. Prior reforms have enabled India and Mexico to attract foreign investment and raise capital expenditure. In addition, the upcoming election in India is also expected to see the incumbent party return to power. Benefits from reforms are expected to cascade down to households and companies.
Equities in South Korea and Taiwan appear likely to recover from an improving technology cycle. This will help earnings—South Korea and Taiwan are expected to drive earnings growth in EMs in 2024. Earnings growth in the EM region is expected to reach 18% in 2024.6
China’s economic outlook remains challenging. While a swift rebound in growth is not likely, clear signs of a bottoming in growth will be welcomed. We believe that select China-based companies have been oversold due to weak sentiment, but fundamentals remain strong.
In our view, a recovery in earnings and monetary easing are two factors that will likely aid returns. Healthy corporate and household balance sheets should also help to boost equities. Although risks such as geopolitical tensions remain, we are of the view that positive fundamental factors will continue to drive long-term returns.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.
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1. Source: Bloomberg, January 3, 2024.
2. Source: Bloomberg. As of December 8, 2023. MSCI Emerging Markets Index is used to represent emerging markets. MSCI Emerging Markets Index is used to represent emerging markets. The MSCI Emerging Markets Index captures large- and mid-cap representation across 24 emerging markets countries. MSCI All-Country World Index is used to represent “global.” The MSCI ACWI captures large and mid-cap representation across 23 developed markets and 24 emerging markets countries. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
3. Source: Bloomberg, January 3, 2024. There is no assurance that any estimate, forecast or projection will be realized.
4. Ibid.
5. Ibid.
6. Source: Bloomberg. December 8, 2023. There is no assurance that any estimate, forecast or projection will be realized.