After experiencing two challenging years, emerging market (EM) equities are making a robust comeback.
As monetary tightening begins to ease, investors are increasingly attracted to these markets, which boast significantly cheaper valuations compared to their developed counterparts.
The outlook for EM growth and earnings is optimistic, underpinned by improved margins from historically low levels.
Additionally, the potential weakening of the US dollar, particularly against EM currencies, further strengthens the case for EM investments.
Several factors contribute to the renewed interest in EM equities.
One of the primary drivers is earnings growth measured against the US dollar.
Historically, EM markets perform better when the US dollar is weak or weakening. A strong dollar typically creates headwinds for these markets, as seen in the past cycle. However, recent trends suggest that the US dollar may be peaking.
Over the last two years, the dollar has remained relatively flat against EM currencies, and while it has shown overall strength against global currencies, indications are emerging that this trend might reverse.
Monetary policies also play a critical role in this resurgence. For the first time ever, interest rates in EM have converged with those in developed markets.
This convergence is a positive development for EM, reducing the cost of capital. The decline in interest rates is viewed as a crucial positive factor, as it supports corporate earnings and GDP growth, among other variables.
A key factor driving growth in emerging markets (EM) is the increasing size of the middle class and the rise in incomes across various EM countries.
Over the long term, the GDP growth in these markets has consistently surpassed that of developed nations. This trend is primarily fuelled by urbanization and the expansion of the middle class.
The easing of monetary policies and the subsequent decline in interest rates create a favourable environment for EM equities. Lower interest rates reduce borrowing costs, fostering business expansion and investment.
This, in turn, drives earnings growth, making EM stocks more attractive to global investors. The relationship between interest rates and earnings growth has typically been positive, and this trend is expected to continue.
To my mind, the rebound of emerging market equities is underpinned by a combination of factors that create a compelling investment case, to which savvy investors are now increasingly paying close attention.
Nigel Green is deVere CEO and Founder
Also published on Medium.
