Time for the emerging markets comeback?

Key Takeaways

• Emerging market returns are c.12% below developed markets this year
• Developed markets are pricing in the delivery of a soft landing, pushing their valuations higher
• But this is very difficult to achieve, and we believe has created attractive opportunities within the emerging market space for 2024

Time for the emerging markets comeback? It’s no secret that emerging market returns have trailed those of their developed counterparts this year by some 12%. Despite China’s reopening and favourable trading terms being agreed, emerging markets relatively weak (though positive) returns can be attributed to the increased prospect of a ‘soft landing’ within developed markets, their lower technology exposure, lacklustre Chinese growth and resilient a US. A soft landing refers to a manufactured slowdown in economic growth while avoiding recession and elevated employment weakness. This is the goal for each of the developed market central banks at present, who have paused raising interest rates at their latest committee meetings – a sign perhaps that we have reached late cycle. Though the prospect of delivering this outcome is gathering momentum at present, it is no easy feat and arguably the only other time the Fed delivered a ‘soft landing’ was in the mid-1990s. Since most developed markets are now facing elevated recession risks, the appeal of emerging markets has grown as a diversification tool. The market is at historically low levels, growth prospects are widely being downgraded elsewhere and we expect policy support, particularly from Beijing. History suggests that when similar return disparities have occurred in the past, we have seen positive momentum move into emerging markets, in some cases rises 20% the following year. Source: Numera Analytics Although emerging markets are by no means immune to crises elsewhere, the impact on regional activity is typically short-lived with valuations recovering quickly once investor confidence returns. Bowmore portfolios We are positioned to take advantage of this opportunity within the emerging market space, and currently allocate c.10% to the region within our risk profile 5 mandate. Our exposure comprises a range of diversified actively managed funds including specific allocations to Indian and Chinese equities. We’ve also rotated our passive exposure to US markets into an equally weighted index as mentioned in previous updates with the intention to spread sector exposure away from the "big tech" skew found in the conventional index.