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Supported by the ongoing U.S.-led global economic growth, the macroeconomic outlook for emerging markets (EMs) seems to be improving since late 2023. Anticipated monetary policy loosening in the United States and the eurozone further contributes to this positive outlook.
U.S. Economic Optimism Fuels EM Ascent
According to S&P Global, U.S. growth forecast for second-quarter 2024 has witnessed an uptick, partially attributable to the sustained strength displayed in the labor market. Up from 1.5% last quarter, the U.S. GDP is expected to expand by 2.5% in 2024, mirroring the previous year’s growth rate, per the rating agency.
This implies that EMs will benefit more, especially in the first half of 2024. Data pointing to stabilization of U.S. manufacturing, should support EMs that are dependent on the U.S. economy.
Will Weakening Greenback Spell Opportunity for EMs?
The greenback's value tends to move inversely with interest rate adjustments by the Fed. The rising probability of the Fed cutting interest rates from the second half of this year makes the dollar less attractive to foreign investors, resulting in decreased demand for the currency. EMs tend to perform well when the U.S. dollar weakens.
According to the CME FedWatch Tool, the Fed may begin reducing interest rates as early as in June, with a 62.3% probability that they will decrease to 5-5.25%. The likelihood of rate cuts rises thereafter, with the rates potentially dropping to 4.5-4.75% by the end of the year, supported by a likelihood of 34.9%.
However, according to Reuters, driven by growth in the U.S. manufacturing sector in March, marking its first expansion since September 2022, the greenback rose with market sentiments shifting as bets on a Federal Reserve rate cut in June were reduced.
EMs Ride the Waves of Marginal Improvement
Per S&P Global, 2024 real GDP growth forecast for EMs excluding China, marginally improved to 3.9% from the previously estimated 3.8%. Growth forecast for 2025, remain stable at 4.4% for EMs excluding China. The 2024 GDP growth forecasts by the rating agency, experienced notable upward adjustments, with Mexico leading by 70 basis points, followed by Türkiye with 60 bps, Peru with 50 bps and India with 40 bps.
Improving Investor Confidence to Help EMs Cause?
According to Triodos Investment Management, encouraging indicators favoring the growth potential of EMs outweighing that of advanced economies, can result in investors shifting their focus away from the latter. The GDP growth disparity between developed and emerging markets has been notably expanding, and should China achieve its development targets, this gap could continue to widen.
Moderating inflation levels in EMs, falling to 8.4% at the end of 2023 from 9.8% in 2022 is a positive sign. Peak of inflationary pressures seemed to have passed in numerous emerging markets, with Colombia, Peru and Brazil intensifying the rate of interest rate reductions this year.
Conversely, countries like South Africa, the Philippines and India have exercised caution, opting to wait for clearer signals indicating a more substantial alleviation of inflationary pressures.
Some Headwinds Still Prevail
Even with improvements, EMs will still face major obstacles in 2024, making their economic paths unstable, as per S&P Global. The challenges include the residual impact of elevated interest rates as well as the possible tailwinds from an expected slowdown in U.S. economic growth, which would be more pronounced in the second half of 2024. Furthermore, a busy election calendar could throw off the predictability of policy, which could, in some circumstances, hurt investment prospects.
ETFs in Focus
Against this backdrop, below we highlight a few emerging market ETFs that may gain strength ahead.
iShares Core MSCI Emerging Markets ETF (IEMG - Free Report) ) has gained 10.04% over the past year and 3.83% over the past three months.
Vanguard FTSE Emerging Markets ETF (VWO - Free Report) ) has gained 8.52% over the past year and 3.71% over the past three months.
iShares MSCI Emerging Markets ETF (EEM - Free Report) ) has gained 7.76% over the past year and 3.43% over the past three months.
SPDR Portfolio Emerging Markets ETF (SPEM - Free Report) ) has gained 9.81% over the past year and 3.86% over the past three months.
Schwab Emerging Markets Equity ETF (SCHE - Free Report) ) has gained 7.81% over the past year and 3.71% over the past three months.
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Unlock Opportunities With Emerging Market ETFs
Supported by the ongoing U.S.-led global economic growth, the macroeconomic outlook for emerging markets (EMs) seems to be improving since late 2023. Anticipated monetary policy loosening in the United States and the eurozone further contributes to this positive outlook.
U.S. Economic Optimism Fuels EM Ascent
According to S&P Global, U.S. growth forecast for second-quarter 2024 has witnessed an uptick, partially attributable to the sustained strength displayed in the labor market. Up from 1.5% last quarter, the U.S. GDP is expected to expand by 2.5% in 2024, mirroring the previous year’s growth rate, per the rating agency.
This implies that EMs will benefit more, especially in the first half of 2024. Data pointing to stabilization of U.S. manufacturing, should support EMs that are dependent on the U.S. economy.
Will Weakening Greenback Spell Opportunity for EMs?
The greenback's value tends to move inversely with interest rate adjustments by the Fed. The rising probability of the Fed cutting interest rates from the second half of this year makes the dollar less attractive to foreign investors, resulting in decreased demand for the currency. EMs tend to perform well when the U.S. dollar weakens.
According to the CME FedWatch Tool, the Fed may begin reducing interest rates as early as in June, with a 62.3% probability that they will decrease to 5-5.25%. The likelihood of rate cuts rises thereafter, with the rates potentially dropping to 4.5-4.75% by the end of the year, supported by a likelihood of 34.9%.
However, according to Reuters, driven by growth in the U.S. manufacturing sector in March, marking its first expansion since September 2022, the greenback rose with market sentiments shifting as bets on a Federal Reserve rate cut in June were reduced.
EMs Ride the Waves of Marginal Improvement
Per S&P Global, 2024 real GDP growth forecast for EMs excluding China, marginally improved to 3.9% from the previously estimated 3.8%. Growth forecast for 2025, remain stable at 4.4% for EMs excluding China. The 2024 GDP growth forecasts by the rating agency, experienced notable upward adjustments, with Mexico leading by 70 basis points, followed by Türkiye with 60 bps, Peru with 50 bps and India with 40 bps.
Improving Investor Confidence to Help EMs Cause?
According to Triodos Investment Management, encouraging indicators favoring the growth potential of EMs outweighing that of advanced economies, can result in investors shifting their focus away from the latter. The GDP growth disparity between developed and emerging markets has been notably expanding, and should China achieve its development targets, this gap could continue to widen.
Moderating inflation levels in EMs, falling to 8.4% at the end of 2023 from 9.8% in 2022 is a positive sign. Peak of inflationary pressures seemed to have passed in numerous emerging markets, with Colombia, Peru and Brazil intensifying the rate of interest rate reductions this year.
Conversely, countries like South Africa, the Philippines and India have exercised caution, opting to wait for clearer signals indicating a more substantial alleviation of inflationary pressures.
Some Headwinds Still Prevail
Even with improvements, EMs will still face major obstacles in 2024, making their economic paths unstable, as per S&P Global. The challenges include the residual impact of elevated interest rates as well as the possible tailwinds from an expected slowdown in U.S. economic growth, which would be more pronounced in the second half of 2024. Furthermore, a busy election calendar could throw off the predictability of policy, which could, in some circumstances, hurt investment prospects.
ETFs in Focus
Against this backdrop, below we highlight a few emerging market ETFs that may gain strength ahead.
iShares Core MSCI Emerging Markets ETF (IEMG - Free Report) ) has gained 10.04% over the past year and 3.83% over the past three months.
Vanguard FTSE Emerging Markets ETF (VWO - Free Report) ) has gained 8.52% over the past year and 3.71% over the past three months.
iShares MSCI Emerging Markets ETF (EEM - Free Report) ) has gained 7.76% over the past year and 3.43% over the past three months.
SPDR Portfolio Emerging Markets ETF (SPEM - Free Report) ) has gained 9.81% over the past year and 3.86% over the past three months.
Schwab Emerging Markets Equity ETF (SCHE - Free Report) ) has gained 7.81% over the past year and 3.71% over the past three months.