Emerging markets are starting to get money’s attention. The global MSCI Emerging Markets stock market index registers a rise of 7% in 2024, lower than developed markets, with gains of around 10%, but which represents a rebirth after years of declines. The Hang Seng index of the Hong Kong Stock Exchange managed to recover in April and has accumulated an increase of close to 10% this year, but it has dropped 35% in the last five years. Analysts are in favor of starting to invest in these markets, although with a mandatory selection given the diversity of regions and countries that make up the group of emerging markets.
The recent improvement in China contrasts with the fall of close to 7% in the Mexican Stock Market and with the unstoppable bullish rally in the Indian Stock Market, which gained 7% this year and accumulated a rise of 100% in the last five years. in its Sensex index of the Bombay Stock Exchange. But the interest aroused by these markets is due both to their own merits and to the problems of developed countries. Furthermore, investment in emerging markets cannot be ignored, since the weight of these countries in the overall global GDP is close to 60% and is expected to continue rising.
Dan Scott, head of multi-assets at the Vontobel manager, highlights their strengths: “Emerging central banks were quicker to raise interest rates when global inflation accelerated for the first time and debt-to-GDP ratios They are, in many cases, better than those of their developed counterparts, which makes the yield on emerging market debt attractive,” he explains. To this, Daniela Savoia, emerging markets fund manager at Edmond de Rothschild AM, adds: “The geopolitical volatility currently observed in Europe and the United States also supports an argument for diversification towards emerging markets.”
And as a summary of the macroeconomic environment for these countries, Gillian Edgeworth, macroeconomic strategist at Wellington Management, forecasts “a moderate slowdown in emerging market growth in 2024, but we do not expect a strong shock to growth as lower inflation and rates “Lower interest rates boost the purchasing power of consumers and businesses.”
Bag
India and China appear as the stock markets most followed by analysts, with the doubt whether the first will continue its streak of several years of increases and if the second will put an end to the bad behavior and mistrust due to the crisis in the real estate market and local debt. , to which are now added overproduction and trade conflicts with the United States. The Asian giant attracts less consensus as a bet to invest in the Indian market. Patrick Zweifel, chief economist at Pictet AM, still recommends that investors have a greater weight in China compared to the rest of the emerging countries, in raw material producing countries compared to manufacturers, in debtor countries and in open economies. “The long period of dollar overvaluation is likely to end once the Fed begins to cut its interest rates, which is positive for emerging markets, particularly for more open economies,” he concludes.
Other experts continue to bet on India, despite the reputation of having an expensive stock market. For Vivek Bhutoria, head of global emerging markets at Federated Hermes, “the Indian equity market is the most diversified of the emerging markets, both from a sectoral and business point of view. In addition, it is very oriented to its own economy and has a premium for the lower geopolitical risk that investors must pay.”
The recent rally in the Chinese stock market raises hopes of a more lasting recovery, although India is preferred due to growth forecasts in the next decade
Ashish Chug, emerging equity portfolio manager at Natixis, compares India and China, betting on the former. He believes China’s long-term structural problems will persist and that the biggest challenge will come from the real estate sector, as much of consumer wealth is tied up in these assets. He is concerned about trade tensions with the United States and the aging of the population, with the average age currently 39 years old. “Half of our portfolio is in India, which will soon become the world’s third largest economy.” And he adds that “the country is expected to be among the fastest growing major economies over the next decade, with annual GDP growth of more than 6%. “This growth is driven by the large working-age population, the rise of the middle class, and continued urbanization and industrialization.”
The US bank Goldman Sachs is also overweight the Indian market after the recent election results. “We believe that the relative attractiveness of Indian stocks remains intact and we continue to expect the Nifty 50 index to reach 26,000 points in June next year” (now it moves at 23,500 points), they point out.
But the recent rise in the Chinese market also opens the doors to a recovery of a stock market that has been severely damaged in recent years. Mirko Wormuth, equity analyst at the German management company DJE, highlights its low price. The MSCI China continues to trade 54% below its 2021 high and with a price-to-book ratio of 1.2 times (in October 2007 it was 5.3). Furthermore, the P/E is 9.9 times, which represents a 20% discount compared to the MSCI Emerging Markets. “This is the lowest valuation observed since 2017, so there is ample room for improvement,” he alleges.
Another novel aspect of emerging stock markets is the increasing weight of dividends. Matt Williams, chief investment officer at abrdn, believes they should be taken into account as solid income generators: “The proportion of companies in emerging markets that pay dividends is practically the same as that in developed markets. Furthermore, what is more significant is that almost 40% of companies in emerging markets pay a dividend greater than 3%, according to Bloomberg,” he indicates.
Bonuses
The other large leg of financial investment, bonds, is also attractive in emerging economies for managers. Of course, Edwin Gutiérrez, head of emerging sovereign debt markets at abrdn, warns of a couple of risks: “The first would be the postponement of US rate cuts until the end of the year. This would keep the cost of financing higher for many emerging sovereign countries and companies, and would likely maintain the strength of the dollar. The second is renewed tensions in the Middle East, which could put upward pressure on the price of oil.”
“The average net leverage of an emerging market company is 1x earnings for investment grade and 2.3x for high yield, which shows the strength of their balance sheets,” comments Daniela Savoia from Edmond. de Rothschild AM.
Flavio Carpenzano, investment director at Capital Group, argues that many emerging market economies are in a healthy position and with sufficient foreign exchange reserves to cushion periods of uncertainty. “We are identifying opportunities such as Latin American local currency bonds, hedged Asian local currency bonds, and selective high-yield or distressed issuers such as Argentina and Nigeria,” he says.
Guido Chamorro, co-manager of Pictet Global Emerging Debt, also shows his preferences for bonds, “highlighting the debt of higher-yielding emerging markets, such as Egypt, Ecuador, Argentina, Sri Lanka and Ukraine. But we underweight sensitivity to interest rate variations in better quality debt, where valuations are tight, such as Mexico, Uruguay and China.” And he concludes: “This debt can provide an annual return in dollars of 8.9% for the next five years.”
The global vision of emerging markets, both in stocks and bonds, is positive after years of disinvestment, also caused by the good moment that developed markets have been experiencing. Investors did not need other alternatives. But everything indicates that in 2024 this trend has changed.
Decarbonization, deglobalization and demography
Population. A recent study by the manager Schroders highlights the good moment of emerging countries to address the paradigm shift driven by “3D”, in reference to deglobalization, decarbonization and demography. Regarding the latter, some emerging countries are developing and implementing technology that will help the world manage the decline in labor in many countries. Furthermore, in general, they have younger populations to meet, while this technology arrives, the country’s labor needs.
Energy model. Several countries in emerging markets are among the global leaders in the production and promotion of the energy transition. They are world leaders in the extraction of essential minerals to make the batteries that will power electric vehicles. Chile, Peru and the Republic of the Congo are the three largest copper producers. As for nickel, Indonesia, the Philippines and Russia are the top three producers. And in lithium extraction, Chile and the Republic of the Congo occupy, respectively, second and third place, behind Australia, according to the Schroders study.
Suppliers. Mexico and India have been the main beneficiaries of the measures to depend less on China as a large global producer of goods, to which are added trade tensions with the United States. They are receiving massive investments in manufacturing capacities, information technology services and other productive sectors, the manager explains. Mexico is now the United States’ number one trading partner, and American companies such as Mattel, Tesla and Lego are building factories in northern Mexico. Other emerging countries such as Hungary, Poland, the Czech Republic and Indonesia are also benefiting from the trend towards deglobalization, although not on the same scale as Mexico and India, but these investments will end up benefiting the country’s companies and also its capital markets. .
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