Chief Investment Strategist
The global financial landscape is shifting once again as the Federal Reserve has begun to cut rates, paired with China's renewed economic stimulus efforts. Together, these factors are breathing life back into emerging markets (EM), a space often sidelined during periods of higher US interest rates. With a 50 basis-point rate cut by the Fed and no imminent signs of a US recession, alongside China’s aggressive policy support for its 5% GDP growth target for 2024, it’s time to reassess how investors can capitalize on this opportunity.
The Fed's recent 50bps rate cut, paired with a strong economy that shows little sign of an immediate downturn, creates a "Goldilocks" scenario for EM. As dollar strength wanes and yields become less attractive in the US, capital often flows into higher-yielding EM assets, providing a potential tailwind for these markets. In addition, easier Fed policy provides room for EM central banks – particularly in Asia – to follow suit and support their own growth, which given additional reasons for flows to get diverted to EM assets.
After a period of sluggish growth, China is pushing hard to meet its ambitious 5% GDP target for this year. Several rate cuts and policy measures have been announced, positioning China as the anchor for broader EM growth.
China is planning at least 800 billion yuan ($114 billion) of liquidity support for stocks and will allow brokerages and funds to tap the central bank’s funding to buy equities after the benchmark CSI 300 Index fell to more than a five-year low earlier this month. That came as part of a broad package of policy measures to revive the economy, including a cut to a key short-term interest rate and lower borrowing costs on as much as $5.3 trillion in mortgages. There were other measures to support the property sector as well, including lower minimum down-payment ratio on second home purchases.
As China focuses on reviving domestic demand, many emerging markets with strong trade ties to China—particularly in Asia—stand to benefit.
Emerging markets present diverse opportunities across various sectors and countries. For a broad exposure to EM, investors could consider the following:
Fed rate cuts may ease currency and rate pressure across all emerging markets and help crowded trading themes such as AI broaden out beyond north Asia. Latin America and Southeast Asia remain well positioned to capture the alpha that Fed easing cycles usually generate for emerging markets.
With domestic demand resilience and structural reforms, India continues to emerge as a bright spot in the EM world. Tailwinds from global supply chain diversification away from China further support growth prospects.
However, investors should watch for risks related to upcoming state elections and the implementation of key reforms such as labor and land policies, which could cause market volatility.
With a young population, strong consumer demand, and a government pushing infrastructure development, Indonesia is an emerging market with significant growth potential.
Despite its promise, local elections and labor protests could cause instability. Investors should also monitor how the government handles environmental policies and regional power struggles.
Supported by higher commodity prices, Brazil remains an attractive option, particularly in the energy and agriculture sectors. Moreover, its central bank has been proactive in cutting rates, potentially leading to a strong recovery.
Local political risks include ongoing fiscal debates, corruption concerns, and uncertainty over the effectiveness of economic policies. Political polarization in the lead-up to the 2026 election could introduce volatility.
South Africa's natural resources and mining sector stand to benefit from rising demand for commodities like precious metals. However, frequent power cuts (load shedding) and political scandals continue to threaten growth prospects.
The ANC's internal struggles and upcoming elections could add further uncertainty, with a risk that policy changes or delays in reforms could hit investor sentiment.
Mexico benefits from its proximity to the US and strong trade relations, particularly as companies nearshore production. This positions Mexico well for future growth, but political risks remain.
Regulatory changes, energy reforms, and nationalist policies could impact market sentiment. Investors should also watch for developments in US-Mexico trade relations, especially under a potential new US administration.
Taiwan is at the forefront of technology and semiconductor manufacturing, with firms like TSMC (Taiwan Semiconductor Manufacturing Company) leading the way. The country's strategic position in global tech supply chains offers significant growth potential.
Investors should remain cautious about geopolitical tensions with China and domestic political changes, which may introduce market volatility.
South Korea's robust technology and automotive sectors position it well for growth. Companies like Samsung and Hyundai are leaders in their respective fields, driving innovation and exports.
However, investors need to be aware of risks related to North Korean tensions and domestic political issues, which can impact market sentiment.
For investors looking beyond equities, EM bonds provide an attractive way to capture yield, particularly as global rates decline. EM central banks will have room to cut rates as the Fed begins its easing cycle, further enhancing the appeal of these bonds. EM bonds offer diversification through local currency and dollar-denominated options, capturing both interest rate differentials and potential foreign exchange gains.
As the Fed cuts rates and EM currencies stabilize, local currency bonds provide an opportunity to gain exposure to both yield and FX appreciation. Countries like India, Indonesia, and Brazil offer solid growth prospects alongside relatively higher interest rates. Asia stands out, given the region's resilience and China’s stimulus efforts bolstering neighbouring economies.
For investors seeking more stability and less currency risk, dollar-denominated EM bonds present a compelling option. These bonds offer higher yields than developed market bonds while limiting exposure to currency fluctuations. Latin American and African countries, such as Brazil and South Africa, feature prominently in this space.
While emerging markets are positioned for growth, it’s crucial to acknowledge the risks that could derail the momentum:
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Head of Fixed Income Strategy
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