Emerging markets have seen a decade of dramatic underperformance, but their fortunes may change in 2024 once dynamics shift in the US interest rate and currency landscape, and as key elections around the world potentially move market sentiment.  

This was the consensus at the ‘Investing in the Dragon’s Den – Emerging Markets Outlook 2024’ seminar hosted by Prescient and RisCura in Cape Town recently.  

Speaking in his keynote presentation, Glenn Silverman, RisCura’s Investment Strategist, was optimistic that emerging markets could see an upswing in 2024.  

“Emerging markets have materially under-performed over the past decade and have been in a very sour spot for a long time. Looking at the MSCI Global Indexes for emerging markets versus developed markets, we can see that there is a very strong inverse correlation between the US Dollar Index and emerging markets. Typically, when the dollar strengthens, emerging markets underperform, and when the dollar weakens, emerging markets rally. Currency weakness in most key EMs has had a significant impact on EM under-performance. However, once the US cuts its rates, the USD is expected to weaken, which should then boost emerging market performance.”  

Silverman highlighted that a further driver of developed market out-performance over the decade has been the much stronger growth in earnings by the former.  A consequence of the strong out-performance by developed market indices, is that they now trade at a near 40% premium (on average) to that of the emerging markets, which is unusually dear.  

“Looking at inflation, we saw it pick up significantly across the globe post Covid, but then start to fall fairly sharply in 2023, both in DMS and EMs. That will allow interest rates to be cut during 2024. EMs will need the US Fed to cut first, else they risk a further weakening of their currencies.  So, once the US cuts its interest rates this year, we should see an improvement in the performance of emerging markets, both from a rating, as well as from a currency perspective i.e. a potential ‘double whammy’.  

Silverman highlighted the performance of four key emerging market currencies from a South African investor perspective, viz. the Indian Rupee, the Brazilian Real, the Chinese Yuan and the South African Rand. All, bar the Yuan – a managed currency, had depreciated sharply over the decade. “From an MSCI EM perspective, China now makes up 25% of the emerging market index (down from a peak of 42% pre Covid), yet well up from 7% back in 2003. South Africa now makes up a mere 3% of the basket (from 6% in 2023), highlighting its significant under-performance, especially in USD terms.” 

Silverman also highlighted India’s dramatic outperformance of China, since around 2021. The significant re-rating of India makes it appear expensive in comparison to China. Even more noteworthy though, has been the even more significant under-performance of Chinese tech vs US tech stocks, over that same period. Both of these provide a potentially exciting opportunity for those contrarian, value-oriented investors.  

Tian Pan, Head of Strategy and Product at Prescient China, who is a specialist in Chinese economics and geopolitics, said China’s poor equity market performance, over the past three years especially, largely due to its strict Covid lockdowns, was the biggest negative contributor to emerging market stock performance.  

“We believe fundamentals always matter in the long-term, and what’s interesting with China is that we are seeing a lot of fundamental numbers that are completely disconnected from the stock market.” 

He said the local Chinese stock market was down by 21% since 2018 in local currency terms, looking at the local CSI Onshore Equity Market index, and if one looked at various property indexes, it was down by between 65% and 77%. The property sector did however only make up about 4% of the entire Chinese equity market at its peak and now represents only around 1% of the onshore Chinese equity market. “Property as a whole is bad, and has many direct implications on the economy, but from the equity market perspective it’s not that bad.” On the other hand, the Chinese electric vehicle market was booming, with more than half of global sales emanating from Chinese brands.  

The Covid tourism slump also affected the financial market negatively, but consumer confidence is returning and spending is recovering. Enormous tourism growth is predicted for the next few years, as retail confidence has started showing signs of slow recovery. A case in point was the Chinese New Year, one of the biggest migrations in human history, where hundreds of millions of Chinese leave the cities to visit their family villages.  

Pan said there were many examples of media headlines being very alarmist about China, but that it did not always align with reality. “We don’t believe Taiwan will be the next Ukraine. The pro-independence DPP party just won the elections, but lost their majority, and the likelihood of an escalating military conflict between China and Taiwan is closer to zero than any significant probability currently.” 

Pan acknowledged that US-China relations were unlikely to improve anytime soon, but business was likely to boom with many other parts of the world. China was for instance issuing visa exemptions for businesspeople from several European countries. China is also part of the biggest free trade area in the world, Regional Comprehensive Economic Partnership (RCEP), and has applied to join other multilateral free trade agreements. These include the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), an Asia-Pacific trade bloc consisting of 11 countries, and signifies that China is keen to increase its global trade in the near future.  

With a lineup of speakers including Silverman and Pan, as well as a further panel of speakers from investment houses like NinetyOne, Fairtree and Bataleur Capital who discussed the impact of EMs on SA equities, the event aimed to educate and inform South African investors about the opportunities and risks of investing in emerging markets. Kim Gibb of Prescient, who co-hosted the event with RisCura, said it was important for the industry to gather at events such as these to share knowledge, especially in volatile and tumultuous periods like the year 2024, when 65% of the world – including South Africa –  is going to the polls, the US economy is likely to take a knock and geopolitical tensions intensify around the world.