Following the Great Financial Crisis, the western monetary madness led to years of outperformance for US equities. Now that central banks are lowering interest rates and the global economy seems to be picking up, emerging markets are becoming attractive again.
Together with many Asian countries, emerging markets essentially act as a kind of warrant on the global economy. Moreover, central banks in emerging markets responded much more swiftly and effectively to rising inflation. Here too, there is room for interest rate cuts and profit recovery.
Before the Great Financial Crisis, emerging markets were also popular with investors. Boosted by China’s membership in the World Trade Organisation in 2001, emerging markets, along with commodity markets, were then a proxy for investing in China. Now, they are becoming interesting for investors once more.
Emerging markets are often bought with the idea that they grow faster than developed markets, but whether shareholders benefit from this is another question. What’s more important for emerging markets are reforms that make them more like developed markets. However, they do remain particularly sensitive to the global economic cycle.
In the global economy, emerging markets are gaining a larger weight due to their faster growth, and thus they are benefiting more from growth within their own markets. Additionally, the trend of deglobalisation has led to increasing investments in emerging markets outside of China.
Turning point
Meanwhile, Chinese policymakers are trying to accelerate the growth of their economy. Many measures have been taken, which financial markets often describe as too little or too late, but this was also said of US measures after the Great Financial Crisis. In the end, things worked out, and the psychological turning point often comes when policymakers start to panic, allowing the market to stop panicking.
Recent direct interventions from Beijing suggest that the “sense of urgency” is now firmly understood. This provides a solid foundation for the Chinese stock market, benefiting other emerging markets too. You can expect even more Chinese measures in the coming months. Currently, it feels like every three days, they are introducing new measures, and emerging markets will ultimately benefit from these increasingly aggressive stimulus actions.
At present, emerging markets are undervalued (except for India), but low valuations alone are not a reason for these markets to outperform. What’s more crucial is the easing of monetary policy. This could eventually impact the US dollar, particularly against the yen and the renminbi.
Return to the US
In this context, the US elections are also relevant. It seems Trump is likely to win, as he is leading in six out of seven swing states with two weeks to go. Bookmakers are increasingly backing Trump as well.
Trump’s vice president is J.D. Vance. Those who have read his book, Hillbilly Elegy, understand that the Trump administration wants to bring manufacturing back to the Midwest. This can only happen with a much weaker dollar. There are already whispers of a “Mar-a-Lago agreement,” similar to the Plaza Accord of the 1980s.
Trump is threatening higher import tariffs on China and other countries after the election. Emerging market stocks could react negatively to this, although some of this may already be priced in. Nonetheless, Republicans under Trump view import tariffs differently than the Democrats. For Trump, tariffs are a tool to achieve a goal—a starting point for negotiating a deal.
The 60 percent tariff on Chinese goods is mainly election rhetoric. It will likely be introduced, but gradually at 2.5 percent increments, until China is willing to make an “America First” deal. For example, Trump has said that the current extremely high tariffs on Chinese electric vehicles will be scrapped if BYD, for instance, starts producing its cars in the US. While the Democrats are unwilling to even talk to the Chinese, a deal on US car production with the Republicans seems quite possible.
Frontier markets
The relative performance of emerging markets has been improving, even before the Chinese stock market flipped from being the worst-performing market to the best-performing one in a week this year. The reason is that central bankers in emerging markets responded more quickly to rising inflation, giving them more room to lower interest rates.
This benefits not only equities in emerging markets but also bonds. Emerging market debt is once again outperforming debt from developed countries this year. Many currencies in emerging markets remain attractively valued. Alongside emerging markets, the larger frontier markets are also of interest. In Argentina, Javier Milei is overseeing a unique political and economic experiment. Vietnam remains the largest frontier market, although it is in line to be upgraded to developed market status.
Unlike in the past, the differences between emerging markets have grown. They are no longer just a proxy for China, which offers more diversification opportunities.
Han Dieperink is Chief Investment Officer at Auréus Vermogensbeheer. Earlier in his career, he was Chief Investment Officer at Rabobank and Schretlen & Co.