Outlook 2024: Anything can happen in EM in 2024; advisers say cautiously prepare for unknown

Chicago, Dec. 29 – The market outlook for 2024 has been cast as a “twilight zone” between either a slowdown or a possible recession, according to Andrew Pease, the chief investment strategist at Russell Investments.

“We are in a twilight zone between slowdown, possible recession and recovery, where nothing is likely to be quite what it seems,” Pease writes in the Russell team’s global market outlook.

The predictive analysis for many advisers is applicable to the global economy and emerging markets debt, in addition to the domestic and developed market spheres.

Luis Oganes, head of global macro research at JPMorgan, notes that modeling for either a “soft-landing,” the buzz word terminology for the investment banking hope that in an economic pullback the pain will be minimal, or a full-blown recession calculates to a 100 basis points’ “difference between the two scenarios in terms of risk premia.”

JPMorgan’s outlook for 2024 explicitly cautions to expect the unexpected.

Flash back to a year ago, and predictions for 2023 also contained a list of unknowns including the length of the war between Russia and the Ukraine and the emergence of China from Covid pandemic lockdowns.

The end of 2023, 12 months later, still has the question of longevity in Russia and Ukraine and there is also a new global risk with a war in the Middle East. The reopening of China post-lockdown is now resolved, but the Chinese economy clearly faltered in the property sector with prominent defaults casting a shadow on international new issuance from that country.

Against those knowns and a host of unknowns, analysts recommend a focus on high-quality debt for 2024 and China is commonly carved out separately as its own economic ecosystem.

Quality

Several analysts recommend focusing on quality in 2024, particularly sovereigns and investment-grade rated issuers.

“We believe investment-grade corporate and sovereign yields offer attractive opportunities where credit risk is limited and thus insulated from spread widening and high US Treasury yields allow investors to harvest near-record levels of carry,” Lazard Asset Management summarized in an outlook note on emerging markets.

Looking back a few years, Ghana and Chinese property developers would have fit that description.

However, with a hindsight view, when trouble hits and a debtor in an emerging market does not have enough money to pay all of the bills, there is an order to using the available resources.

Debtors tend to focus on continuity of their business or government, then they address domestic investors and then work with international investors.

So, even focusing on what seems qualitative in 2024 has a degree of unpredictability going forward.

Further, PineBridge Investments’ Jonathan Davis notes in a 2024 emerging market corporate debt outlook that geopolitical risks have not abated.

The Israel-Palestine war could have a not-yet-calculated broader impact.

Also, as a reminder, Ukraine renegotiated the country’s sovereign and semi-sovereign debt for a two-year extension at the start of the war, that will likely need renegotiating at least one or more times.

Ukraine’s debt load is unresolved and there could be broader impact in Europe still.

Davis also notes that 2024 has a busy election calendar, with general elections in India, Indonesia, Mexico and South Africa as well as obviously in the United States.

China, India

China has nearly been synonymous with emerging markets for years. The country is the largest emerging markets economy, after all.

However, there is a noticeable shift when talking about growth in emerging markets for 2024 where China is carved out as a singular entity and the discussion revolves around a forecast that applies to the rest of the EM universe...and then separately China.

China shifted tracks, to some degree, when it took longer to emerge in the early part of 2023 from Covid lockdowns.

Amundi outlined a global investment outlook that noted that a strong India will grow particularly faster than China.

The analysis posits that India will emerge as a “new power offering bright economic prospects amid strong domestic demand and investments (6.0% growth in 2024 and 5.2% in 2025).”

In contrast, the Amundi report notes that in China additional “fiscal stimulus will not reverse the trend towards lower growth (3.9% in 2024 and 3.4% in 2025).”

The Russell Investments report tends to agree, stating that while “China’s economy appears to be stabilizing in response to piecemeal stimulus policies,” the country’s “debt and property market problems will continue to be a headwind and growth is likely to remain lackluster.”

Wells Fargo Investment Institute also notes that China has slower growth potential.

State Street is on the same page, with India’s ascent presenting “an interesting opportunity” as China’s “recovery disappointed.”

U.S. interest rates

One of the unknowns going into 2024 is the course of U.S. Federal Reserve rate hikes on emerging markets.

The tide potentially turned recently when the market turned on optimism that the Fed would be routinely decreasing rates in 2024, specifically in the back half of the year.

However, expecting the unexpected includes the tightening or loosening of rates from the United States.

PineBridge expands on how tighter rates impact lower-grade issuers more acutely than higher-grade issuers.

The asset manager says that higher-grade issuers, whether sovereign or corporate, have a choice between the domestic market and the international market.

If rates are high, those issuers can go with a potentially lower interest rate environment and issue debt in their local currency.

However, lower-grade issuing countries, for instance, “are not able to issue in their local currencies given the lack of a local investor base and an unwillingness among international investors to take on highly volatile foreign exchange risk, so those countries will have to refinance at considerably higher U.S. dollar borrowing costs.”

Morgan Stanley reiterates that rate sensitivity is marked in EM. According to the bank’s outlook, emerging markets “could see stronger recovery in the second half as lower rates and a weakening U.S. dollar could prompt inflows.”

Morgan Stanley starts its overall outlook for the year, though, with a summary that encapsulates the state of the markets generally with: “Investors face tough choices in an imperfect world, but can look for opportunities in fixed income while remaining cautious on emerging markets and commodities.”

With so much uncertainty and opportunity for yield elsewhere, caution is the watchword heading into 2024 as the path forward is murky.

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