Amid global recessionary fears, China’s economic deceleration, and geopolitical conflicts, emerging markets (EMs) showcased resilience, led by growth in India, Mexico and Brazil. Does the coming year pose new challenges or opportunities? Investment experts share their views on the emerging market outlook for 2024.

Macroeconomic outlook for emerging markets

Many experts anticipate a challenging start for emerging markets in 2024, with a potential upturn in growth expected by the middle of the year.

Morgan Stanley talks about the risks associated with emerging markets, such as a strengthening US Dollar and tepid growth in China. It particularly highlights the triple risk of debt, demographics, and deflation in EMs.

“These risks are compounded by the corporate focus on diversifying supply chains amid geopolitical tensions and the fallout from pandemic-era disruptions. However, emerging markets could see stronger recovery in the second half as lower rates and a weakening U.S. dollar could prompt inflows,” opines Serena Tang, Chief Global Cross-Asset Strategist at Morgan Stanley Research.

Also, as per JP Morgan, “A bumpy start to the year is expected for emerging markets…given high rates, geopolitical developments, and lasting U.S. dollar strength. However, EM should become more attractive through 2024 on EM-DM growth divergence, demand for diversification away from the U.S. and low investor positioning.”

Meanwhile, Amundi believes emerging markets might soon enter a cyclical downturn phase, but it is unlikely to be a recessionary scenario. The asset manager anticipates a mild recovery by mid-2024. 

“Next year, EM growth is expected to decelerate to 3.6% on average from around 4% this year. Importantly, the growth premium in favour of Emerging Markets over Developed Markets is projected to continue widening,” opines Debora Delbò, Senior EM Macro Strategist at the Amundi Investment Institute.

Emerging market equity outlook

While a weak Chinese stock market impacted investor sentiments, the resilience of emerging economies contributed to keeping EM equities buoyant.

Eaton Vance believes that macroeconomic trends and themes in India, Mexico, Brazil, Indonesia, South Africa, and Poland should support equity markets. “Country dispersion in emerging markets is increasing. Monitoring inflation, policy and growth cycles with an active approach will be key in EM equity investing,” elucidates Jitania Kandhari, Head of Macro and Thematic Research, Emerging Markets Equity at Eaton Vance. 

At the same time, Lazard Asset Management believes that the growth in emerging market equities will be driven primarily by emerging Asia and information technology companies. The asset manager is particularly optimistic about the earnings growth in EMs. 

“…the outlook for earnings growth in emerging markets is more optimistic over the coming years, tracing a profile similar to that which occurred from 2016 to 2018, when emerging markets outperformed developed markets by approximately 25%,” affirms Lazard. 

Meanwhile, State Street Global Advisors contends that despite persistent challenges in China, there is a relative opportunity for EM equities. However, it also highlights the risks related to EM equities indices. 

“Outside of China, emerging markets tend to be heavy on cyclical companies and industries, making them especially sensitive to global economic activity,” informs Christopher Carpentier, Investment Strategist at State Street Global Advisors.

Emerging market bond outlook

The emerging market’s bond sector will offer more favourable prospects than its equities in 2024, as per experts. “EM local debt is…more attractive than EM equities given the increasingly opaque outlook for China, particularly on macroeconomic policy, which has an outsized impact on equity indices,” specifies Maya Bhandari, Global Head of Multi-Asset from BNP Paribas. 

Separately, Pictet Asset Management is also optimistic about local EM sovereign debt. “Given their low correlation to developed-market bonds and their expected outperformance next year, local-currency EM sovereign bonds are an attractive source of portfolio diversification,” asserts the asset manager. Pictet also favours hard-currency EM corporate bonds for 2024. 

Additionally, Aviva Global Investors expects double-digit returns from EM bonds next year. “Yields for emerging market hard currency sovereign bonds are still high despite the recent rally, and carry is compelling enough to offset US Treasury volatility.”  

“Improving fiscal and balance-of-payments dynamics and a steadying in China economic growth are also supporting the outlook for the asset class,” adds the asset manager. 

Besides, PIMCO talks about holding positions in countries with high credit quality, attractive valuations and return potential. “Brazil and Mexico, where the disinflation process is further along, and real rates are distinctly high, stand out to us,” remarks Erin Browne, Portfolio Manager, Asset Allocation at PIMCO.