Emerging markets saw an extensive period of growth throughout the 2000s, which was caused by many favourable external factors. This included growing global demand for goods and services combined with a growth in supply chains which allowed for increased international trade and accelerated globalisation. Lower interest rates in developed economies also allowed for stable financial conditions worldwide. Furthermore, the commodity price ‘supercycle’ (where commodity prices are substantially above their long-run trend) was advantageous for commodity-exporting emerging economies.
Despite this, the growth of emerging markets since 2011 has been disappointing. Varied circumstances such as uncompetitive currencies and the easing of commodity prices meant growth amongst emerging markets lacked. Furthermore, investors were penalised for holding emerging market equities as the dollar began to appreciate in 2014, increasing the currency risk of investments. More recently, the uncertainty in the geopolitical landscape such as the COVID-19 pandemic, the Russia-Ukraine war, and the hostility in the Middle East has added new economic challenges for emerging markets. 2023 also saw disappointing growth in the majority of emerging market economies (excluding Mexico and Brazil) which was led by China (currently accounting for 30% of the MSCI Emerging Market benchmark) and the concerns surrounding its real estate sector. Statistically, this has meant emerging markets have significantly underperformed demonstrated by the MSCI Emerging Markets Index only achieving 2.66% growth in the last 10 years (2013-2023).
2024 is expected to bring a bumpy start for emerging markets with high-interest rates, geopolitical developments, and consistent US dollar strength all contributing to a tough economic environment. However, towards the end of the year, emerging markets may see a stronger recovery if the US dollar weakens, and lower interest rates kick in. Furthermore, 2024 is shaping up to be one of the busiest electoral calendars in recent years, within both emerging and developed economies, with 40 national elections taking place worldwide. Elections among economies should be watched closely as they can contribute to a changing geopolitical landscape, differing global supply chains and long-term economic and fiscal changes.
2024 also sees many economies coming towards the end of their tightening policies as inflation begins to ease, with Brazil and Hungary beginning their easing cycles in 2023. In particular, there is a large focus on the US economy and its economic cycle. Many are speculating as to whether a soft or hard landing scenario will occur. “For EM assets, there is likely hundreds of basis points’ difference between the two scenarios in terms of risk premia,” said Luis Oganes, Head of Global Macro Research at J.P. Morgan. Therefore, investors should be cautious of the unpredictable economic landscape for 2024 with diversification being key for portfolios to spread risk.