Investment Adventures in Emerging Markets

Perspective

Emerging Market Insights: 2024 Outlook

Drivers for emerging markets in 2024 include a potential recovery in earnings growth, the likelihood of a US soft landing, and evidence that interest rates have peaked. Get the latest outlook from Franklin Templeton Emerging Markets Equity.

Three things we are thinking about today:    

  1. 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
  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.
  3. 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.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data.  Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Distributors, LLC, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com – Franklin Distributors, LLC, member FINRA/SIPC, is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

_______________

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.

Get Content Alerts in My Inbox

Receive email alerts when a new blog is posted.