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Emerging markets set to perform

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They have underperformed their developed counterparts for over a decade but if fund manager predictions are anything to go by, emerging markets look set to return to favour this year.

The key to a possible renaissance lies in the US and how policymakers resolve the ongoing fiscal uncertainty. If the country manages to deliver a soft-landing, taking inflation back to more palatable levels and avoiding recession in 2024, the stage is set for a major boost for manufacturing, with emerging markets being the obvious beneficiaries. 

Charles Jillings, Portfolio Manager of Utilico Emerging Markets Trust, says: “We are becoming increasingly excited by the prospects for emerging markets in 2024. Whilst some emerging market countries have already marginally reduced interest rates, further cuts are likely to come in 2024 as real rates in the majority of emerging markets are now typically positive, inflationary pressures are under control and these markets are becoming more robust to external shocks.”

Jillings adds: “With falling inflation and a weaker US dollar, emerging markets should be in a position to take full advantage of the global upswing in manufacturing activity that is anticipated to happen later in 2024 and into 2025.”

Political change is also on the horizon with 40 per cent of the world’s population taking part in elections this year.

Significant emerging markets set to hit the ballot boxes this year include Taiwan; Pakistan; Indonesia; India; Mexico; and South Africa, while in the developed world, citizens of the US and UK are set to cast their votes in 2024.

According to Andrew Ness, Portfolio Manager of Templeton Emerging Markets, it is these latter elections that will likely have the biggest impact.

“Overall, we don’t expect a major impact on the portfolio as most incumbents are expected to prevail, leading to policy continuity. Taiwan looks like the closest race with the incumbent DPP lead narrowing in recent polls. A DPP defeat, however, may lead to a softening in the rhetoric with China leading to, potentially, positive market consequences.”

Ness continues: “Overall, little noise is expected from the emerging market electoral cycle. There is probably a bigger scope for volatility in key developed market elections this year.”

Lindsay James, investment strategist at Quilter Investors, agrees that the US elections will be significant for global markets, noting the possibility of a return to Republican administration led by Donald Trump, which has obvious ramifications for the United States’ nearest emerging market, Mexico. 

“There has perhaps never been a more consequential and important US presidential election than this one and it tops the list of the events to watch in 2024. The spectre of Donald Trump looms large in this one, and if, as he is expected to do, he runs again the divisiveness in the US will be ratcheted up another level. Given the events that surrounded his departure in early 2021, it is not hyperbolic to say that US democracy could be put under severe pressure, and markets may not like that outcome.”

Further words of caution come from Charles Ferraz, Chief Executive Officer at the New York-based investment boutique Itaú USA Asset Management, who warns investors that nothing can be easily predicted in 2024.

“The only certainty we have about the outlook is that surprises are inevitable. Hence, the crucial focus on diversification, resilience, and seizing opportunities persists. Investors must meticulously construct portfolios and allocate resources wisely, prioritizing professionals showcasing expertise in navigating the complexities of dynamic and volatile markets.”

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