A mediocre year for emerging markets
2022 was a disaster for emerging markets (EMs); in 2023 they were simply mediocre. The asset class crashed by a fifth last year as “zero-Covid” Chinese lockdowns and Russia’s expulsion from the index hit returns.
Hopes for a strong relief rally this year went unfulfilled. The MSCI EM index has gained 4.6% in the year to mid-December, badly lagging the average gain of 19.9% for the equivalent index tracking developed markets. China’s post-Covid reopening proved a damp squib, while high interest rates in the rich world encouraged investors to stick with the perceived safety of US assets rather than seek their fortune in more exotic places.
Broken China
A look under the bonnet shows that the average emerging market did rather better. Brazil soared by 22%, while shares in burgeoning superpower India gained 16.5%. The EM index was dragged down by Chinese equities, which have the largest weighting among EMs. The local CSI 300 index is down by 14% in 2023, on course for its third successive year of losses.
Last year East Asian stocks fell amid softening global consumer demand. This year, by contrast, China’s main trading partners managed to decouple: Korea’s Kospi gained 15%, while Taiwan’s Taiex rallied 25%. Chinese shares were not the worst EM performers – Thailand’s SET index is down 16.5% as manufacturing exports have weakened and investors taken fright at government plans to borrow billions of dollars to stimulate consumption.
Other Southeast Asian markets also struggled, with the Malaysian KLCI index down 2% and the Philippines PSEi index off 1.5%. More happily, Indonesia’s IDX Composite has risen 7.5%. Vietnam’s VNIndex gained 9.5%, but the country is usually classified as a frontier market, so not included in most EM trackers.
Commodity exporters had a solid year, with rising oil prices pushing Saudi Arabia’s Tadawul All Share Index up 10%. Chile’s IPSA advanced 16.5%, while Brazil’s Ibovespa soared 22% as new president Lula made it clear he won’t go on a spending spree.
In recent weeks markets have begun to salivate over the prospect of US interest-rate cuts in 2024. That should see more capital flow into neighbouring Latin America, powering a rally that helped push up Mexico’s IPC index 17.5% this year.
The exception among the commodity players was South Africa, whose JSE Top 40 index returned a mediocre 3%. Resilient commodity demand has kept things ticking along, but chronic power cuts are hurting business and high government debt levels are worrying investors.
In Europe, Poland’s Wig 20 index vaulted by 29.5%, retracing most of the ground it lost last year after war erupted in neighbouring Ukraine.
Long-suffering Greece’s luck has finally turned. The Athens ASE index surged by 39% this year, with investors cheered by the re-election of business-friendly prime minister Kyriakos Mitsotakis in June. A tourism boom helped Greek GDP grow 2.1% in the third quarter year on year, even as much of Europe stagnates.
Argentina did even better, but that didn’t lift EMs because it was kicked out of the MSCI EM index in 2021. Since then, local shares have exhibited a level of volatility worthy of bitcoin. Its Merval index soared 358% in local-currency terms this year as Argentines sought a safe haven from crushing inflation. Even in dollar terms, stocks climbed 58% by 30 November as investors bet on new libertarian president Javier Milei.
Emerging-market valuations are “well below” their ten-year average and trade at “a 25% discount to developed markets”, says Ewan Thompson of Liontrust. That leaves the asset class “well placed” for 2024.
Every December we get predictions that “the year ahead might finally bring better times for emerging markets”, says Dan Jones in the Investors’ Chronicle. Yet over the past five years EMs have cumulatively returned just 12% in sterling terms. Still, with inflation generally under control across EMs and the dollar plausibly set to weaken, the auguries are at least encouraging as we head into a new year.