Looking back

The turn of a new year is synonymous with resolutions, predictions, and optimism about what the next 12 months will bring. Commentators far and wide dust off their crystal balls and haul out their astrology charts to discern the path forward for markets, often to dubious effect. We think it’s fair that before we talk about our outlook for the next year, we look at how our 2022 outlook has performed.

This time last year, we were excited about the outlook for emerging markets in 2023 for three reasons: Firstly, it looked like a peak in the USD was rapidly approaching. There is a strong inverse relationship between the USD and emerging market equities, so this would benefit our asset class. This has more or less come to pass. Following 11 consecutive interest rate rises, US interest rates have been held steady at 5.25% for the last two Federal Reserve (FOMC) meetings. Inflation now appears to be under control. Since the last FOMC meeting at the end of October, the USD index has lost -3.5%. The MSCI EM Index has gained +7.7%. While it’s taken some time to reassure markets that monetary policy has worked, these are encouraging signs for EM equities from here.


Secondly, in December last year, China had just stumbled out of its last lockdown. The nation’s post-covid recovery was an exciting prospect, particularly the revenge spending driven by its $5.6tn of pandemic-era savings. It’s fair to say that this has not played out how most people would have guessed: After an encouraging start, geopolitics, the property sector, and battered consumer confidence conspired to leave China as the worst performing major equity market this year. The MSCI China index is not far off its covid-era lows, with the aggregate the cyclically adjusted Price-to-Earnings ratio (a measure of a company’s valuation relative to the long-term average of its earnings) at levels not previously seen since 2016. Valuations have been pummelled. Since 2000, Chinese companies have only ever been cheaper 4% of the time on this basis (Bloomberg, 2023). This is the world’s second largest economy, filled with a well-educated populace and world-class businesses against a backdrop of improving relations with the West and an increasingly effective series of policy nudges. And yet valuations remain stubbornly low. Have we reached peak pessimism? The fog surrounding China’s outlook is increasingly clearing, and while it hasn’t played out in 2023, we believe there are fertile conditions for a Chinese recovery over the coming 12 months.


Thirdly, we talked about the impressive growth differential between emerging and developed markets. This has also begun to pay dividends. While most developed economies have managed to avoid recessions in 2023, revised down IMF growth forecasts paint a fairly anaemic-looking 1-2% GDP growth future. Emerging economies, on the other hand, continued to grow through 2023 and now have the strongest relative headline lead indicators since June 2009; and, even including China, the aggregate EM purchasing managers index (PMI) is near its highest level ever. This already strong backdrop is overlaid with supportive EM central banks and attractive equity market conditions: For the first time in history, EM interest rates are forecast to fall below DM rates over the next 4 quarters (in aggregate). We have already seen some evidence of this in emerging equity market performance in the latter half of the year.


While it looks like two of our predictions have played out, how have these impacted the asset class? From first glance, EM equities have had a tough 2023, returning +5.8% to end November 2023 compared to the +20.4% investors would have experienced by holding the S&P 500 – a proxy for developed market performance. However, this is a slightly misleading comparison. Firstly it overstates both the positive impact of the “magnificent 7” US tech firms and the negative impact of China’s poor 2023. To understand how the majority of emerging markets stocks have performed against the majority of developed market stocks, it’s a more reasonable comparison to look at MSCI EM ex China index against the equally weighted S&P 500 index. Now how the tables turn. From this view, emerging markets ex China have returned +12.1% compared to +5.3% for developed markets. It’s clear that something is working here.

Chasing Goldilocks

Turning our sights to 2024, we believe we have the most exciting coalescence of factors to support EM performance since the early 2000s. Our goldilocks scenario for 2024 is that (1) the US avoids a recession and (2) continues to print relatively low growth expectations in an environment where (3) global interest rates remain steady or begin to fall with (4) a weakening USD. Against this backdrop the relatively higher growth available to investors in EM becomes more obvious, leading to increased allocations to the asset class and greater support for asset prices. Research by Bank of America earlier this year showed that investors’ underweight to EM globally, relative to the allocation that would be suggested by the MSCI All Countries World Index, is at multi-decade lows. A return, even to the 20-year average level, would imply inflows into the asset class of more than $600bn.


Evidence of these three factors have already begun to emerge. The US ‘soft-landing’ looks like reality, with the country consistently reporting falling inflation and resilient employment. Secondly, the outlook for US growth appears muted, with the IMF forecasting 1.5% GDP growth for 2024. Higher borrowing costs, increased federal spending, and Federal Reserve Bank quantitative tightening makes the likelihood of an upside surprise, an increasingly unrealistic out-turn. Finally, with US interest rates at the highest level since 2007, the risk is low that there are more hikes from here. This should also see the USD continue to weaken, adding further support to the asset class going forward.

Looking ahead

Casting our views further into the future, we think the world could be on the precipice of an epochal shift in economic growth. Over recent decades, this has come from two sources: China’s export fuelled growth, or the USA’s access to cheap shale energy and cheap money. Integration and globalisation have meant that all investors benefitted from these tailwinds, but have also been subject to their whims. The past three years, however, has seen a paradigm shift: we no longer live in the same globalised world that we did. In particular, the West’s sanctions of Russia have had made many non-Western companies/individuals wary of being caught out by the Western system. This has driven a splintering of global spheres of influence. Direct trade, bypassing the US dollar (USD) is becoming increasingly common, with regular reports of direct commodity transactions in Chinese Reminbi and Indian Rupees.


What does this mean for investors? In our view, it means that global trade and growth may be less dependent on these two nations going forward, and more dependent on cross-border investment between countries. This could be very positive for EM. Already the share of trade between EM countries is more than 40% of total EM exports. Emerging markets constitute the world’s last great engines of growth: they have vast, young populations; are well educated and entrepreneurial; are rapidly growing their wealth; benefit from inbound and domestic capital investment; and are increasingly run by fiscally conservative, stable governments. Greater integration of EM economies helps support this growth and reduce reliance on the slower growing developed world.


It can be hard enough to predict markets, let alone ensure your predictions come to fruition in an arbitrary 12-month period. Indeed – in a light-hearted jab at our fixed income colleagues – over a long enough horizon, any inflation is transitory! Like our investment approach, our outlook towards emerging markets should be viewed over the long term. Emerging markets offer long-term structural growth opportunities, world-class businesses, favourable demographics, and low-cost and highly-skilled labour forces – Investing in emerging markets should be a significant long-term allocation for any investor! However, in the spirit of the season, we think 2024 is shaping up to offer the best confluence of factors that we have seen in a decade and are very optimistic about the next 12 months.

The value of active minds: independent thinking

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

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