The electoral calendar for 2024 is shaping up to have a big sway on global emerging markets (EM), according to Lazard Asset Management.
With votes taking place in countries that cumulatively account for over a third of EM gross domestic product, Lazard has said this will have important implications for geopolitics, global supply chains, and long-term economic reform.
“Considering the dispersion in monetary and fiscal policies and the heavy election year in 2024, we believe there are ample opportunities for alpha generation,” the firm said.
In sovereign credit, countries that Lazard favours include Colombia, Oman, Indonesia, Azerbaijan, Paraguay, and Serbia.
“In local debt, we see opportunities in high yielders where real yields remain substantially above potential growth rates while we are generally avoiding duration exposure in Asian low yielders, most notably China and Thailand,” it added.
“We believe 2024 will also be rife with idiosyncratic opportunities, with elections scheduled for major emerging markets including El Salvador, Pakistan, Indonesia, Senegal, Turkey, India, South Africa, Panama, Dominican Republic, Mexico, Sri Lanka, Uruguay, Venezuela, and Ghana.”
Emerging markets: more attractive than ever
Lazard believes that EM remains one of the most mispriced asset classes globally, with valuation discounts relative to developed markets and US equities sitting near 30 per cent and 40 per cent, respectively.
“The sharp rise in the EM discount relative to DM [developed markets] is driven to a significant extent by China’s low valuations,” the asset manager said.
“Ex-China, however, EM discounts are inline with the 10-year average. Currently, the price-to-earnings (P/E) ratio for the MSCI EM Index is trading at approximately 12x over the next 12 months, or slightly above its long-term average of 11.3x.
“Over time and barring any adverse geopolitical or economic events, we would expect this valuation discount to narrow, driven by a combination of stronger earnings growth, the potential increase in EM profitability, where the return on equity gap of emerging versus developed markets narrows, and the possible widening of the economic growth premium.”
The firm added that emerging market economies are now enjoying an economic growth premium over developing markets, something not seen since the early 2000s.
“Boosted primarily by energy companies in Latin America, dividend yields for the MSCI EM Index remain an attractive characteristic for the asset class, sitting at just under 3 per cent, a near 20 per cent premium relative to history and double that of the S&P 500 Index.”
Following a sharp decline throughout 2021 and 2022, earnings growth expectations have also moved higher for emerging markets compared to developed markets, with Asia leading from a regional perspective and IT from a sector perspective.
“Today, economic growth across regions is moving in a non-synchronous fashion, which, we believe, should result in a more balanced global growth outlook.”
India, for example, is expected to benefit from a demographic dividend with citizens under 50 making up nearly 80 per cent of its population, while Indonesia’s growth prospects are also improving as it is “climbing up the metals value chain”, according to Lazard.
The asset manager continued: “Much capital has left emerging markets in recent years, and many parts of the asset class remain markedly under-owned despite being attractively valued, with high and improving economic growth and financial productivity, such as return on equity, free cash flow yield, and dividend yield.”
Moreover, the firm maintains a constructive outlook for emerging market debt, which ended the year by posting its largest quarterly gain since 2020, bringing the gain for 2023 into double digits across both sovereign credit and local debt.
“Fixed income markets historically tend to generate equity-like returns during the period between the end of central bank rate hikes and the completion of rate cuts. We expect this trend to continue as major global central banks have concluded their rate hike cycles, with inflation remaining better than expected and labour markets loosening,” it said.
Some key trends shaping Lazard’s base case include the ECB and Fed initiating a traditional cycle of rate cuts in mid-2024, DM growing stagnant at near zero per cent in 1H24, and emerging markets growth set to pick up in 2H24.