Are emerging markets going to outshine developed markets in 2H 2024?
Emerging market (EM) central banks have arguably been relatively successful in taming the post-Covid and wartime energy shocks, in many cases stabilizing growth. As a result, we notice markets pricing a period of relatively stable policy interest rates across major developed market (DM) and EM economies, with substantial interest rate spreads that vary widely over the coming years.
Major EM economies are catching up
Boom/bust growth cycles are central to the question of why many EM countries have failed to catch up with DM and EM-to-DM-graduate economies so far in term of per capita incomes and lower capital asset prices. Macro volatility has been so extreme that even long growth cycles have been undermined by deep recessions; DM countries have tended to grow more slowly but have fewer, shallower recessions, whereas most EM countries have had much more frequent and far deeper recessions.
However, there are some outliers in Asia who managed to catch up and tended to have growth cycles with few if any severe downturns. A good example of this could be China and India, where trend growth rates accelerated from time to time without severe downturns except for the COVID period, which was not an economic cycle per se, since the negative growth stemmed from the decision to lockdown.
The case of China is especially notable. China went from repeated mid-cycle swings until the GFC to very successfully targeting and smoothing growth until the pandemic, which significantly accelerated its expansion to one of the largest economies globally.
EM central banks were relatively quick to react
Although the pandemic and Ukraine War weighed down on both EM and DM economies, many EM central banks were arguably faster in stabilizing inflation perhaps more effectively than many major DM central banks. Yet attributing this to EM central banks becoming stronger might be a loud statement. We think EM central banks tightened monetary policy earlier because the rapid pace of inflation in EM countries was more apparent compared to that of inflation in DM countries.
Old ordinary vs. New normal
In some respects, this set up reminds us more of pre-Global Financial Crisis “old ordinary” rather than the pre-pandemic “new normal”. We believe there is a strong case for a return from ultra-easy monetary policy and low rates and yields in many EM economies to significant variations in growth and inflation rates.
Nevertheless, we do not see strong reasons to fear an early return to boom/bust cycles. Some potential EM turnaround stories like Turkey and Argentina are seeking to regain credibility and restore stability – we believe the jury is still out. Rather there should be more diversifiable set of risks and returns across the major EM economies, for which we are constructive about macro stability but do not exclude the possibility of future fluctuations in volatility.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
