Emerging Market Assets: Final Push for 2024 Gains

Emerging market assets have staged a remarkable comeback in the final quarter of 2024, driven by a combination of factors that have sparked investor optimism and fueled a rally in stocks and bonds. As the year draws to a close, emerging markets (EM) are poised to deliver strong gains, led by China's stimulus prospects and a slowdown in US interest rate hikes.

The coordinated stimulus announcement in China during the third quarter of 2024 was a significant catalyst for the EM rally. The Chinese government's efforts to boost economic growth, including monetary, property, and equity market changes, have driven near double-digit growth in the EM space. China's equity market, in particular, has rallied by over 20%, with the consumer discretionary sector benefiting from improved confidence following the stimulus announcements.

The US Federal Reserve's 50 basis point rate cut in Q3 2024 has also played a crucial role in the EM asset performance. This monetary policy easing has significantly boosted the performance of more interest rate sensitive countries in emerging markets, such as Indonesia, Thailand, and the Philippines. These nations witnessed near double-digit growth, driven by a >20% return in China.

Latin American markets have shown differentiated performance, with Brazil up 7% and Mexico down 3%. While investor concerns over Mexico's judicial reform have weighed on its performance, Brazil has benefited from strong GDP growth and loan growth. Despite the mixed performance, the overall emerging market asset performance remains robust, with near double-digit growth driven by China's >20% return.

The Federal Reserve's rate cuts in 2024, totaling 100 basis points, have led to a significant decline in emerging market bond yields. As of September 30, 2024, the JPMorgan EMBI Global Diversified Index yield stood at 5.5%, down from 7.2% at the start of the year. This decrease in yields, coupled with a weaker dollar, has attracted capital flows into emerging market bonds. According to EPFR data, emerging market bond funds saw inflows of $1.2 billion in the week ending November 21, 2024, marking the largest weekly inflow since August.

The Fed's policy decisions have also significantly influenced emerging market currencies, particularly those with high dollar exposure. As the dollar's strength eased, currencies such as the Mexican peso and the Turkish lira experienced a rebound. The peso appreciated by around 10% against the dollar in 2024, while the lira gained nearly 15%. This trend was supported by the Fed's shift in policy, which reduced the attractiveness of the dollar and allowed emerging market currencies to strengthen.

The Fed's communication and forward guidance on inflation and economic growth have significantly influenced investor sentiment towards emerging market assets in 2024. In November, Fed Chair Jay Powell signaled a slowdown in interest rate hikes, which boosted emerging market stocks and bonds. The MSCI EM index rallied 14.6% in US dollar terms, its best month since 2009, while EM debt climbed 7.6%, the highest since 1998. This shift in Fed policy, coupled with hopes of China loosening Covid-19 curbs and a dollar sell-off, has relieved pressure on developing economies.

As the final push for 2024 gains continues, investors remain cautious about global growth prospects and geopolitical tensions. However, the positive performance of emerging market assets in the latter part of the year suggests that the outlook for these markets remains promising. With continued investment and innovation, emerging markets are well-positioned to deliver strong returns in the coming years.