Equity Markets Recently on an Upward Trend

Recently, many markets have reached new yearly highs, and sometimes even record highs. In the emerging markets universe, equity exchanges in countries like India and Hungary have marked new all-time highs. The recession fears for the USA that briefly flared up in early August were quickly dispelled by new, more robust economic data, and a good earnings season for companies (not just in the USA) contributed to this. Recently, all eyes were on the US Federal Reserve (Fed) and its first, eagerly anticipated interest rate cut.

US Federal Reserve Significantly Cuts Interest Rates

The cut, at 50 basis points, was as high as during the global financial crisis of 2008/2009. Fed Chairman Powell made a strong effort to dispel any notion that this was a panic reaction by the Fed and emphasized the robustness of the US economy. The financial markets initially reacted positively. As long as economic data suggests that this was primarily a preventive rate cut (and there are good, well-founded arguments for lowering rates), investor sentiment is likely to remain positive.

Positive Effects for Emerging Markets?

This should also have positive effects on both equities and bonds in emerging markets. Both US Treasury yields, and the US dollar are likely to continue their downward trends that had already begun. Even if they only decline moderately further, this should, based on all historical experiences, be beneficial for equities and bonds in most emerging markets. So far this year, emerging markets have once again lagged significantly behind developed markets, with only about half the value increase (just under 9% versus over 16%, in US dollars). This performance gap could potentially close in the coming quarters. Relative stock valuations also support this. However, the leading indicators for global manufacturing currently (still) argue against such a scenario. These indicators continue to move sideways or point to a renewed weakening. If they turn upward again in the coming months, this would provide additional tailwind for emerging markets.

More Heterogeneous Than Ever

In this context, it cannot be emphasized enough that emerging market equities are more heterogeneous than ever, even though they are considered an asset class. Therefore, such general statements can only provide a rough framework. For example, commodity-exporting economies behave very differently from countries like China or India. And even these two heavyweights in the emerging markets universe differ significantly.

China Continues to Face Significant Problems

China, for example, is now responsible for about a third of global industrial production but is struggling with significant overcapacity. Additionally, many foreign companies and investors are increasingly withdrawing from the country. Geopolitics also plays a significant role here: China has long been in the crosshairs of the USA and is therefore subject to higher risks. India, on the other hand, has been a favorite among investors for years, despite the market being consistently overvalued.

India Remains an Investor Favorite

Unlike China, India is courted by Washington as a partner. However, it has so far managed to remain independent, keeping lucrative economic relationships open with (almost) everyone. This year, however, it is not China but Latin America that has been the weakest region among emerging market stock markets. Partly, this is already a shadow cast by the upcoming US presidential election.

Currently, the central and eastern European markets lie somewhere between India, China, and Latin America. They lack the significant demographic advantage and growth dynamics of India. However, they can boast greater legal certainty and better infrastructure, and their connection to the EU ensures higher financial stability. On the other hand, they are currently burdened by the Ukraine conflict, their geographical proximity to Russia, and the current general growth weakness of the entire European region.

Changing Favorites in Emerging Markets?

To a significant extent, the current valuation levels of the respective equity markets reflect these perspectives or snapshots. It is very likely that there will be quite significant changes in the medium to long term. Therefore, the future performance ranking of emerging markets will most likely not resemble that of recent years.