Looking forward to 2024, the MSCI emerging market stock index rose by 7.1% last year. Which markets are expected to perform better this year？

In 2023, the overall performance of emerging market stock markets was good. The MSCI Emerging Markets Index rose by 7% in 2023 and fell by 18% in 2022. In terms of major stock indexes in various countries, Brazil’s IBOV index rose by 22%, Argentina’s MERVAL index rose by 360%, Mexico’s composite index rose by 18%, India’s Nifty index rose by 20%, and South Korea’s KOSPI index rose by 19%.

Some emerging market stocks fell. Among them, KLSE in Kuala Lumpur, Malaysia fell by 2.97%, SETI in Thailand by 14.1%, FTSE Abu Dhabi by 6.2% and Manila by 1.8%. In China stock market, as of the close of December 29th, 2023, the Shanghai Composite Index reported 2,974.93 points, down 3.70% for the whole year, and the Shenzhen Component Index fell 13.54% for the whole year. The Beizheng 50 Index achieved an annual contrarian increase of 14.92%.

Wang Youxin, a senior researcher at China Banking Research Institute, said in an interview with 21st century business herald that in 2023, the stock markets in emerging markets mainly benefited from the following factors: on the one hand, the interest rate hike cycle of European and American central banks gradually came to an end, especially in the fourth quarter of 2023, European and American central banks gradually suspended interest rate hikes, the international liquidity environment gradually eased, and cross-border capital flowed into emerging markets again. On the other hand, in 2023, the trend of developed and emerging market economies gradually diverged, and the GDP growth rate of developed economies dropped significantly, while the overall growth rate of emerging economies remained relatively stable, attracting cross-border capital inflows.

From the perspective of countries, the stock markets of India, Brazil and Mexico performed relatively well. Wang Youxin said that this is mainly related to the relatively good economic recovery situation in various countries. Specifically, India’s economy has maintained a relatively high growth, and it is gradually becoming a hot spot for the transfer of industrial chains in Europe and the United States. Cross-border capital inflows have increased, pushing the stock market up. The Brazilian government actively promotes economic reform and strengthens international trade and cooperation in emerging markets. Under the background of global economic downturn, its economic growth is higher than expected. Driven by the US-Mexico Free Trade Agreement, Mexico has gradually become an important springboard for the return of the US industrial chain and the entry of enterprises in the Asia-Pacific region into the American market, attracting increasing international investment, while maintaining a high economic growth rate and improving the stock market return rate.

Looking ahead, Ricardo Adrogue, head of global sovereign debt and currency group of Bahrain LLC, said that anti-inflation, economic growth and US monetary policy will remain the key themes affecting emerging markets in 2024.

According to Wu Zhaoyin, director of macro strategy of AVIC Trust Co., Ltd., the current inflation level in the United States and the world is still very high, and there is little room for the Federal Reserve to cut interest rates in 2024. The United States has a high probability of maintaining high interest rates for a long time, which has a greater lethality to the global economy. He told 21st century business herald that the global economy will go down in 2024, which is not friendly to the global stock market. Especially in emerging market countries (such as India, Mexico and other countries), the economic fluctuations are relatively large, and the economic growth rate in 2024 will be under greater pressure of correction, and their stock markets will also face certain risks.

Jason Xavier, head of capital markets of Franklin Templeton)EMEA ETF, predicted that the Indian stock market would perform well in 2023, citing its "demographic advantage". Xavier is also optimistic about Taiwan, China, South Korea and other emerging markets with technological industry advantages, believing that these markets have the ability to benefit from the global artificial intelligence boom.

Wang Xinjie, chief investment strategist of Standard Chartered China Wealth Management Department, told 21st century business herald: "Judging from the historical performance of major European and American central banks after suspending interest rate hikes in the past, the average performance of emerging markets is good. We are optimistic about global stocks and expect the performance of emerging markets, but the risk points are also very clear. If the interest rate cuts in European and American markets are expected to cool down, it will greatly affect the performance of emerging markets."

Performance differentiation of emerging market stock markets in 2023

In 2023, only 19 of the 100 common stock market indexes in the world fell, with a median return of 13%.

According to Liu Xinyu, a macro analyst of Guosheng Securities, the basic feature of global stock market in 2023 is a general increase, and emerging markets are not "outstanding". By horizontal comparison, the overall stock market performance of emerging markets has not outperformed developed markets such as US stocks and European stocks. He told 21st century business herald that there are three main reasons for supporting the global stock market: First, developed economies such as the United States and Europe have not experienced economic recession as expected by the market at the end of 2022, and economic resilience supports the stock market’s profitability; Second, the world’s major central banks have slowed down the pace of raising interest rates and gradually stopped raising interest rates, and global liquidity began to turn marginal to easing; Third, the AI investment boom has driven the market in developed markets to rise, and formed a risk preference resonance on a global scale.

Wang Xinjie told 21st century business herald that emerging markets performed brilliantly in 2023, mainly because inflation peaked in major countries such as Europe and America and the change of monetary policy caliber. Especially in November 2023, after the European and American central banks suspended interest rate hikes and the caliber was biased, it caused a surge in emerging markets.

It should be noted that the stock market performance in different emerging markets is obviously differentiated. Among them, Brazil, Argentina, South Korea, Taiwan, China, India and other emerging markets have increased greatly, while the emerging markets with small or even falling stock markets are mainly concentrated in Southeast Asian countries.

In this regard, Liu Xinyu analyzed that the industrial structures of India, South Korea and Taiwan, China are more in line with the current AI technology revolution. India’s strong economic performance has also attracted a large number of foreign capital inflows, while Brazil and Argentina are more due to a series of reforms and economic stimulus policies implemented by their governments. The economies of Vietnam, Thailand, Indonesia, the Philippines and other countries are highly dependent on exports. In 2023, the global economic slowdown led to a significant decline in exports of these countries, which put pressure on stock market earnings.

Prospect of emerging market stock market in 2024

In 2024, whether the Federal Reserve will cut interest rates sharply as investors currently expect is one of the main factors affecting global stock markets. The Fed has signaled that its monetary policy rate hike cycle may end. In essence, lower interest rates attract less capital, which means less demand for dollars, which leads to potential weakness.

Liu Xinyu told 21st century business herald that considering the global economy, the monetary policy prospects of major global central banks and the downward trend of the US dollar index, it is expected that most emerging market stock markets will continue to rise in 2024.

Wang Youxin also pointed out that emerging market stock markets are expected to maintain good performance in 2024. On the one hand, from the perspective of the international liquidity environment, European and American central banks may enter the interest rate cut cycle again, and the global liquidity tightening situation will be significantly eased, which will promote the global and emerging market stock markets to rebound further. On the other hand, with the trade of export-oriented economies in the Asia-Pacific region stabilizing, the BRICS mechanism formally expanding, South-South cooperation continuing to deepen, economic diversification and investment in new energy in the Middle East increasing, the GDP growth rate of emerging economies will increase in 2024, which will attract accelerated inflows of cross-border capital. In particular, Brazil, Mexico, Asia-Pacific emerging economies, the Middle East, Central and Eastern Europe and other regions will become key areas for cross-border capital inflows.

Wang Xinjie holds a neutral view on Asian (excluding Japan) stocks. He pointed out that on the positive side, Asia (excluding Japan) has the highest 12-month forward earnings per share growth among major markets. The differences in monetary policy between emerging markets and developed markets, coupled with the possible weakness of the US dollar next year, may be conducive to capital inflows. However, there are also some unfavorable factors, including global economic slowdown and depressed investor sentiment, which may put pressure on the market in 2024.

In Asia (excluding Japan), Wang Xinjie suggested over-matching Korean stocks. "This reflects our expectation that the improvement of the semiconductor industry will lead to a rebound in profit growth next year. Since the second quarter of 2023, the valuation of the Korean stock market has fallen sharply, providing investors with a more attractive entry point. " He said.

Liu Xinyu believes that the global economy is expected to stabilize in 2024, which means that the exports of Southeast Asian countries such as Vietnam are also expected to stabilize. Considering the poor performance of their stock markets in 2023, there will be more room for subsequent rebound.

Wu Zhaoyin pointed out that in 2024, China’s stock market has a strong ability to resist risks. "Relatively speaking, the valuation of China’s stock market is relatively low, and the securitization rate of China is only 60%. It is in a low valuation depression in the global capital market, and there is much room for improvement. Moreover, the RMB exchange rate and the inflation level in China are relatively stable and are less affected by the international market. "

Indian stock market is highly valued.

Indian stock market is a bright spot in emerging markets. The MSCI India Index has increased by 46.01% (in US dollars) in the past three years. In the same period, in terms of weight, India is the best performing country among the seven emerging markets of MSCI.

Looking forward to the market outlook, Liu Xinyu believes that under the background of global liquidity turning loose, the growth style is likely to continue to dominate, the AI concept will still maintain a high investment enthusiasm, and India’s industrial structure determines that its stock market will benefit.

Wang Xinjie holds a neutral view on Indian stocks, preferring large-cap stocks to small and medium-sized stocks. However, in both absolute and relative terms, its valuation (12-month forward price-earnings ratio is 21.3 times) is still high.

Wu Zhaoyin told the 21st century business herald that the Indian stock index has increased greatly in the past few years, and the market value of the stock market has also increased a lot in dollar terms, which implies that there is a certain bubble in the Indian stock market. At present, the securitization rate of India’s stock market (stock market value /GDP) has exceeded 100%, which indicates that the country’s stock market has certain risks.