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According to the Morgan Stanley Capital International (MSCI) Index report, the year-to-date return on emerging market (EM) equities stood at 7.49% on June 28, 2024, with an impressive P/E ratio of 12.27. The annualised standard deviation turnover for the MSCI EM was 5.10%, significantly higher than the MSCI World, which was 2.25%. These numbers spell good news for traders wanting to include EM assets in their trading strategy. Read on to learn why the current scenario is an unmissable opportunity.
There is no defined list of emerging markets. It is a spectrum, rather than a threshold. A developing country with a rapidly growing GDP and the potential to become a developed nation is called emerging. The top emerging markets on the MSCI list, which had 24 members as of July 2024, were China, Taiwan, Korea, India, Brazil, South Africa, and Russia. But this list keeps changing, based on the performance of the emerging economies, usually adding more nations.
All countries entered the pandemic the same. However, they emerged differently due to their fiscal and monetary policies. Remarkably, emerging economies could take audacious measures without shaking market confidence. These included government aid in relief spending, liquidity support to MSMEs (micro, small, and medium enterprises) and banks, and programmes to stabilise the domestic financial markets through bond purchases. Undoubtedly, there were certain risks, such as the freezing of loan repayments in countries like India and the redirection of public funds towards managing budget deficits. Four years later, the emerging markets look more promising than the developed markets, which are piling on debt.
With the technology, communication services and energy sectors driving growth, Asia’s emerging markets outperformed the global EMs. Türkiye led the region with the fastest economic growth, closely followed by Taiwan, South Africa, India and China. Latin America was the worst performer among the emerging markets, while the EMEA region performed relatively better.
The election results in India, Mexico and South Africa, have already started showing their impact. The outlook for India and South Africa, where the leaders have been re-elected, remains positive. With a vision to make the country a developed nation by 2047 and demographic tailwinds, India is on track to rapid growth for about the next 2 decades. The growth of the struggling South African economy, however, rests on how well the coalition government can stabilise the political landscape in the country and drive sustainable growth. On the other hand, the Mexican peso was weighed down by Claudia Sheinbaum’s election since she shares the exiting president’s conservative opinions on fiscal policy.
The economic growth of ten of the G20 nations has outdone that of the developed markets between 2000 and 2020. This historical data, backed by several key factors, is driving the bullish outlook on EM growth among traders.
Driven by China, Taiwan, India and other economies, the emerging markets are forecasted to grow at 4.9% in 2024 and 2025. Conversely, the developed economies are expected to grow by only 1.5% during the same period.
The earnings growth expectations for EMs in 2024 and 2025 stand at 17% and 15%, respectively. For the developed markets (DM), it is relatively lower at 11% and 14% for 2024 and 2025, respectively.
Diversification attempts beyond the US dollar are also encouraging investors to look at EM equities and other asset classes. This can help guard their portfolios against the impending monetary easing by the Fed, which may exert downward pressure on the greenback and US economy.
Being young and tech-savvy, the emerging economies are receptive to change. The digital revolution across the education, healthcare and payments sectors has opened new avenues for accelerated growth. For instance, India and Brazil lead the world in the digital payments sector while the APAC has emerged as the primary region for EdTech growth till 2030.
Entrepreneurship and urbanisation-powered economic growth, which prioritises sustainability, is redefining growth and trade in the emerging markets. China leads the world in solar panel production while Brazil has moved 80% of its grid to renewable energy.
To mitigate the risks associated with over-reliance on China, most multinationals have adopted a China-Plus-One approach. The diversifying of manufacturing units outside China is redirecting investments into other emerging markets. This has paved the way for a shift in the supply chain dynamics towards Mexico, India and Vietnam. The policy has particularly benefitted Vietnam, facilitating manufacturing growth, trade agreements, geopolitical stability and employment.
There are many ways for traders to invest in the emerging markets:
Forex traders can invest in micro and exotic pairs to diversify their portfolios. As of end-July 2024, the USD/MXN had risen 10.69% year-to-date. Due to lower stability than majors, trading these forex pairs offers wider swings and more trading opportunities.
As manufacturing in the emerging markets accelerates, these economies will increasingly attract foreign investments. EMs that rely on trade benefit from the uptrend in prices of raw materials and manufactured goods. For instance, Brazil is driven by iron, steel and textile production, China and Korea by chip and EV production, and South Africa rides on the demand for mined gold and platinum.
Since the emerging markets are more volatile, CFDs (contracts for difference) are a popular investment tool. You can take advantage of rising and falling markets without needing to own the underlying asset. However, since CFDs are traded on margin, profit and loss potential are amplifies simultaneously. This makes risk management critical.
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