Rate cuts, growth stocks, and AI support positive outlook for EMs

Portfolio manager at Franklin Templeton highlights 2024 expectations for emerging markets, plus themes for long-term outlook

Rate cuts, growth stocks, and AI support positive outlook for EMs

Rate cuts, stable election expectations, and continued high hopes for tech stocks are all adding to a constructive outlook for emerging markets this year, according to one portfolio manager.

Susan Gim, institutional portfolio manager at Martin Currie, part of Franklin Templeton (pictured above), says policy rates will be more accommodative among EMs in 2024 as inflation numbers roll over and CPI readings continue to be benign.

“In addition, EM economies have been more disciplined in the post-Covid era with superior monetary and fiscal discipline,” Gim told Wealth Professional. “From a big-picture perspective, most if not all of the emerging economies will undertake some form of policy rate cuts.”

Growth comes into focus

Gim notes, inflation has been a non-issue in China with flat to negative price trends reflected in both CPI and PPI readings on a trailing 12-month basis.

Looking at the country’s stock market, she says China-listed quality growth stocks have been impacted by an outflow of foreign investment assets, as well as lower global allocations to EM equity as an asset class.

“One recent development is the increasing probability of slower economic growth coming out of the US,” Gim says. “In this environment, growth stocks have been outperforming in the US as investors are willing to pay a ‘growth premium.’ However, EM growth stocks have lagged value stocks.”

Notwithstanding EMs’ traditional reputation as growth havens, she says value has outperformed growth in those regions for three consecutive years. That trend, she and her colleagues at Martin Currie argue, has made EM growth stock valuations attractive coming into 2024.

With elections set to take place in eight of the 10 most populous countries in the world, according to HSBC, Gim anticipates stability across most EM markets. Most elections in EMs – including Taiwan Indonesia, South Korea, and India – will be held in the first half of the year.

“Electoral disruptions are unlikely with the exception of a few markets such as South Africa where the African National Congress is under pressure,” Gim says.

“India is the next major EM economy to have significant elections with a general election anticipated for April/May 2024. Given the recent results from state elections, where the Bharatiya Janata Party (BJP) had a resounding victory, we expect that BJP will continue its political momentum.”

Tech opportunities emerging

From a portfolio perspective, Martin Currie continues to see long-term upside potential in EM companies with quality and growth characteristics. Many opportunities within that cohort, Gim says, are underpinned by ongoing structural themes supporting emerging economies.

“For instance, we have long believed that EMs are increasingly the producers, and not just consumers, of globally relevant intellectual property and an example of this is in artificial intelligence (AI), where EMs hold a myriad of opportunities,” she says.

Amid an explosion of interest in AI in 2023, she says IT stocks in Asia – particularly from Korea and Taiwan, which saw a dramatic demand shift – contributed very strongly to EM performance.

“We continue to believe that Korean and Taiwan technology companies are best positioned to benefit from a structural demand cycle coming out of AI,” Gim says. “We believe that these companies are now harvesting their intellectual property leadership and able to capture both pricing power as well as tremendous unit growth demand.”

The past 12 months have seen EM tech stocks generate a 16.8% return, contributing around 40% to index performance, Gim says. With the sector expected to benefit from an earnings rebound, she anticipates the trend will continue over the course of 2024.

“There is an entire ecosystem of companies that are set to benefit from long-term growth runways generated from AI,” she says. “IT services, for example, remains a strong cohort of investments in the EMs. IT service leaders can be found in all geographies ranging from India to South America and Central/Eastern Europe.”

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