Developing countries return to focus on money | Financial markets

Emerging markets are starting to attract money’s attention. The MSCI Emerging Markets Global Stock Market Index will register growth of 7% in 2024, below developed markets’ gains of around 10% but representing a revival after years of decline. The Hong Kong Stock Exchange’s Hang Seng Index managed to recover in April and is up nearly 10% this year, but has fallen 35% over the past five years. Analysts are in favor of starting to invest in these markets, albeit with a mandatory choice, given the diversity of regions and countries that exist…

Emerging markets are starting to attract money’s attention. The MSCI Emerging Markets Global Stock Market Index will register growth of 7% in 2024, below developed markets’ gains of around 10% but representing a revival after years of decline. The Hong Kong Stock Exchange’s Hang Seng Index managed to recover in April and is up nearly 10% this year, but has fallen 35% over the past five years. Analysts are in favor of starting to invest in these markets, albeit with a mandatory choice, given the diversity of regions and countries that make up the group of emerging markets.

The recent improvement in China contrasts with a nearly 7% decline in the Mexican stock market and the unstoppable bull rally in the Indian stock market, which is up 7% this year and has accumulated gains of 100% over the past five years. in the Bombay Stock Exchange Sensex index. But the interest generated by these markets is due both to their own merits and to the problems of developed countries. Moreover, investment in emerging markets cannot be ignored, since the weight of these countries in total global GDP is approaching 60% and is expected to continue to grow.

Dan Scott, head of multi-asset at asset manager Vontobel, highlights their strengths: “The new central banks were quicker to raise interest rates as global inflation accelerated for the first time and debt-to-GDP ratios. In many cases they are better. than their developed countries, which makes yields on emerging market debt attractive,” he explains. To this, Daniela Savoie, emerging markets fund manager at Edmond de Rothschild AM, adds: “The geopolitical instability currently observed in Europe and the US also supports the argument for diversification towards emerging markets.”

Summing up the macroeconomic situation in these countries, Gillian Edgeworth, macro strategist at Wellington Management, forecasts “a modest slowdown in emerging markets growth in 2024, but we do not expect a large shock to growth as lower inflation and interest rates will lead to lower economic growth.” interest rates increase the purchasing power of consumers and businesses.”

Bag

India and China appear to be the stock markets most watched by analysts, with doubts over whether the former will continue its streak of several years of growth and whether the latter will put an end to bad behavior and mistrust due to the real estate crisis. The Asian giant is attracting less attention as an investment bet in the Indian market. Patrick Zweifel, chief economist at Pictet AM, continues to recommend that investors have more weight in China compared to the rest of the developing world, in commodity-producing countries compared to producers, in debtor countries and in open economies. “The long period of dollar overvaluation is likely to end once the Fed starts cutting interest rates, which is a positive development for emerging markets, especially more open economies,” he concludes.

Other experts continue to bet on India, despite the country’s reputation for an expensive stock market. According to Vivek Bhutoria, Head of Global Emerging Markets at Federated Hermes, “The Indian stock market is the most diversified of the emerging markets, both from a sectoral and business perspective. “It’s also very focused on its own economy and has a lower geopolitical risk premium that investors have to pay.”

The recent rally in the Chinese stock market raises hopes of a longer recovery, although India is favored due to growth forecasts over the next decade.

Ashish Chugh, new 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 comes from the real estate sector, since most consumer wealth is tied up in these assets. He is concerned about trade tensions with the United States and an aging population, whose average age is now 39. “Half of our portfolio is in India, which will soon become the world’s third largest economy.” And he adds that “over the next decade, the country is expected to rank among the fastest-growing major economies, with annual GDP growth of more than 6%. “This growth is driven by a large working-age population, a growing middle class, and ongoing urbanization and industrialization.”

US bank Goldman Sachs is also overweight in the Indian market following the recent election results. “We believe the relative attractiveness of Indian equities remains unchanged and we continue to expect the Nifty 50 index to reach 26,000 points in June next year” (it is currently trading at 23,500 points), they note.

But the recent rise in the Chinese market also opens the door to a recovery in the stock market, which has been hit hard in recent years. Mirko Wormuth, equity analyst at German asset manager DJE, highlights the low price. The MSCI China index continues to trade 54% below its 2021 high, with a price-to-book ratio of 1.2 times (it stood at 5.3 in October 2007). Additionally, the P/E ratio is 9.9 times, which represents a 20% discount to the MSCI Emerging Markets Index. “This is the lowest score since 2017, so there is a lot of room for improvement,” he argues.

Another new aspect of emerging stock markets is the increasing weighting of dividends. Matt Williams, chief investment officer at abrdn, says they should be considered as reliable sources of income: “The proportion of companies in emerging markets paying dividends is almost the same as in developed markets. Moreover, and more importantly, according to Bloomberg, almost 40% of companies in emerging markets pay dividends of more than 3%,” he points out.

Bonuses

Another important part of financial investments, bonds, are also attractive to managers in emerging economies. Of course, Edwin Gutierrez, head of emerging sovereign debt markets at abrdn, warns of several risks: “The first would be a delay in US rate cuts until the end of the year. This will raise funding costs for many emerging sovereign countries and companies and is likely to support dollar strength. The second is renewed tension in the Middle East, which could put upward pressure on oil prices.”

“Emerging market companies’ average net leverage is 1x earnings for investment grade and 2.3x for high yield, which shows the strength of their balance sheets,” comments Daniela Savoia of Edmond de Rothschild AM.

Flavio Carpenzano, investment director at Capital Group, argues that many emerging market countries are in a healthy position and have 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 selected high-yield or distressed issuers such as Argentina and Nigeria,” he says.

Guido Chamorro, co-manager of Pictet Global Emerging Debt, also demonstrates his preference for bonds, “emphasizing debt from high-yield emerging markets such as Egypt, Ecuador, Argentina, Sri Lanka and Ukraine. But we underestimate the sensitivity to interest rate movements in higher quality debt where valuations are tight, such as Mexico, Uruguay and China.” And he concludes: “This debt could provide annualized dollar returns of 8.9% over the next five years.”

The global outlook for emerging markets, both equities and bonds, is positive after years of disinvestment, also driven by the good times developed markets are experiencing. Investors did not need other alternatives. But everything indicates that this trend will change in 2024.

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