Emerging Markets Quarterly Outlook

January 2024*

Staying the Course

Emerging market equities ex-China were supported by lower US rates and a softer US dollar over the quarter, while the broader index was weighed down by weakness in China. 2024 earnings estimates remain favourable for China and EM, leaving the overall index set up for re-rating from its depressed valuation multiple. Our strategic allocations are unchanged this quarter as we are positioned for a global semiconductor recovery, further US supply-chain readjustment, and a renewable energy transition.

Since our last EM Quarterly, US rates and the US dollar have moved favourably for EM assets. The US is now pricing in five cuts over 2024, and the US 10-year yield is trading about 100bps lower than its peak of 5% in October. Also, the rate decline has pushed the US dollar 4% lower over the same period (based on the Bloomberg Dollar Index). Historically, these factors correlate with EM equity outperformance as debt, capital flow, and exchange rate pressures ease. Indeed, EM ex-China was strong over Q4, rising 13%. However, the broader index underperformed developed market equities due to further weakness in China.

We remain optimistic about the prospects for EM equities in 2024. Earnings estimates for the MSCI EM Index are 18% higher yoy in 2024. These estimates are well above major DM peers, yet EM continues to trade at a modest 12x 2024 forward P/E multiple compared to 17x for the MSCI ACWI Index. A significant driver of EM earnings this year is a further recovery in the global semiconductor cycle, which is already underway, as evidenced by rising global sales. A continuation of this recovery justifies a re-rating of EM equities to a multiple more in line with its DM peers.    

One headwind for EM has been the ongoing weakness in Chinese stocks. Last quarter, we moved our underweight to neutral due to improving activity data from China following various policy measures. Admittedly, this upgrade was premature as the MSCI China Index has continued to underperform. However, we continue to see risks as more balanced given China’s low valuation multiple and ongoing policy support. We note that consensus expectations for 2024 earnings are comparable for China and India, yet China trades at a forward multiple of 9x compared to India’s 22x. While investors may remain concerned about some of China’s long-term structural challenges, global investors may look to reengage in China and EM assets if some underlying drivers improve this year.

Outside China, the recovery in the global semiconductor cycle is supporting the EM Tech sector. We expect Taiwan will benefit from this improvement, while the market is also well positioned to profit from further adoption of Artificial Intelligence (AI) via stronger demand for advanced chips. We remain overweight Vietnam, Indonesia, and Malaysia to capture US supply-chain readjustment trends. Even if US-China tensions moderate this year, nearshoring and friend-shoring trends are unlikely to reverse in the current geopolitical environment. India will also benefit from this thematic driver in the long term, but the market offers limited value at its current elevated multiple. We, therefore, stay underweight. In commodity-linked markets, we remain overweight Saudi Arabia due to the country’s ongoing diversification efforts in the non-oil economy. In South Africa, we stay underweight as power supply issues weigh on the economy, while political instability will prevent meaningful change following this year’s election. 

Market Strategy: Our strategic views are unchanged. Relative to the previous quarter, we made one change to country allocations: 

  • We upgrade Chile to overweight. The Chilean economic cycle is improving following a slowdown last year, while the central bank is expected to continue cutting interest rates. In addition, the domestic political environment has stabilised. In the long term, the economy should benefit from structural copper demand linked to the renewable energy transition. Overall, Chile offers attractive medium and long-term prospects. We fund the upgrade by reducing our overweight to Indonesia ahead of the general election this year.

EM Country Allocation

  Chg -2 -1 0 +1 +2
South Korea        
Latin America
Brazil  –        
Mexico  –        
Europe, Middle East and Africa
Turkey  –        
Saudi Arabia        
South Africa        

Note: Up/down arrows indicate a positive/negative change in our asset allocation compared to the previous quarterly outlook. A dash indicates no change. The table shows the major Emerging Markets.

Source: City of London Investment Management

*The publication reflects asset performance up to 29 December 2023, and macro events and data releases up to 8 January 2024, unless indicated otherwise.

The information contained herein is obtained from sources believed by City of London Investment Management Company Limited to be accurate and reliable. No responsibility can be accepted under any circumstances for errors of fact or omission. Any forward looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.