Economic outlook for Emerging Markets - Q2 2024

The emerging market economies (EMs) have generally been holding up better than their developed market peers over H2 2023 and into 2024. This is evidenced by measures such as the EM composite PMI index, which has remained in expansionary territory while the equivalent index for developed economies has been showing activity slowing.

Some of the key factors explaining this better performance have been the increasing global demand and high commodity prices seen last year, while some EMs have also benefitted from manufacturers looking to shift operations away from China. Yet despite this better growth performance, EM equities are seen as undervalued - by up to 40% - compared to their developed market peers, and this presents an attractive investment opportunity going forward.

However, the picture across the EM world as a whole is mixed. The South African economy, for example, underperformed significantly in 2023 compared to both developed economies and other emerging market economies. Representing only 3% of the MSCI Emerging Market index, down from 6% in 2023, it highlights the country's substantial underperformance.

South Korea, Taiwan and India key markets to follow

Two key markets widely considered for investment opportunities are South Korea and Taiwan, both benefiting from their heavy exposure to the technology sector. With global growth expected to recover over the course of 2024 as central banks begin lowering interest rates, both countries are expected to be key drivers of earnings growth in EMs this year, forecast to be as high as 18% in aggregate.

Another standout EM investment destination is India, which last year attracted an unprecedented net inflow of $8 billion into exchange-traded funds focused on Indian stocks. During the same period, India's NSE Nifty Index surged nearly 20%, easily outperforming the MSCI emerging markets index, which recorded a 9.83% rise.

Strong economic growth is helping to drive Indian stocks higher (up 8.4% in Q4), and we forecast gains of approximately 15% this year. On the back of this, the National Stock Exchange of India (NSE) is anticipated to become the third-largest global stock market by the end of the decade, surpassing both Hong Kong and Japan. Some forecasts suggest India’s GDP will reach $7.5tn by 2031, double the 2022 figure, and exports are also widely expected to double over this period. India also has the second highest weightage in the MSCI index after China.

The biggest obstacle to increased investment flows may be the slowing global growth environment currently being seen, which could leave many EMs needing to rely increasingly on domestic demand to fuel growth. In long term, many countries seeking to be more self-sufficient rather than relying on imports also presents a challenge as some EMs could potentially lose key export markets.

Inflation in emerging markets

In contrast to developed economies, many emerging market central banks responded more promptly to post-pandemic inflationary pressures, ignoring the ‘transitory inflation’ argument, and choosing instead to raise interest rates much sooner.

The result has been that many EMs are seeing some of the most dramatic declines in inflation currently around and are already beginning to adopt more accommodative monetary policies. For example, Brazil and Hungary saw interest rates cut in August and October respectively. A lower interest rate environment that is more supportive of growth potentially presents a more attractive investment environment for overseas investors.

Are EMs promoting a post-dollar global economy?

In the aftermath of the foundation of the BRICS, there is a growing concern regarding the longstanding supremacy of the USD. Both the rise of the BRICS and the increasing popularity of alternative methods of payment such as Bitcoin could pose challenges to the dominance of the USD from an EM perspective.

The past two years have seen the BRICS actively promote the use of national currencies in trade and transactions; China has also been expanding its own alternative payments system to its trading partners while at the same time trying to promote international usage of the renminbi.

Another way in which the BRICS have sought to overcome reliance on the USD is through the pursuit of crypto currencies. There have been discussions in the BRICS nations about adopting Bitcoin or using its underlying blockchain technology to embrace digital currencies generally and reduce reliance on the USD. These discussions have included the idea of a common BRICS cryptocurrency.

However, despite these efforts, the USD remains the dominant medium of exchange globally, accounting for around 54% of global export invoices. Second to the USD is the euro, with a share of approximately 20%, with the renminbi enjoying only a 3% share. This difference underscores the USD's unmatched dominance among global currencies and suggests that any challenge to USD hegemony by the BRICS countries is only a long-term goal.