Emerging markets are set to close out 2023 with their best returns in years, as bets on bigger and faster US interest-rate cuts propelled a blistering late-year rally across the developing world.
MSCI’s benchmark stock gauge for emerging-market equities is on track for a 6.7% advance this year, snapping a two-year losing streak. Its currency equivalent index is headed for a 4.7% gain, its biggest yearly rise since 2017.
On debt markets, bonds in emerging-market currencies are eyeing gains of 6.3%, the best since 2020, while dollar-denominated debt has reaped an 11% return, the most in four years.
The cost of insuring exposure to emerging markets has also eased, with credit default swaps across 22 sovereign issuers sliding an average 72 basis points to levels last seen in September 2021.
Ricardo Adrogue, head of the global sovereign debt and currencies group at Barings LLC, said disinflation, growth, and US monetary policy would remain the key themes for emerging markets in 2024.
“EM overall still offers value, especially in a world where the dollar is likely to have peaked together with US interest rates,” he said.
The greenback has lost nearly 3% this year, its steepest annual drop since 2020, amid bets the Federal Reserve will cut rates by at least 150 basis points, starting March. That will likely weaken the US currency further in the coming months, traders expect.
Adrogue warned however of geopolitical risks that could introduce volatility for emerging markets. Former President Donald Trump is currently the frontrunner for the Republican nomination for next year’s US election.
“There is no doubt that a win by President Trump will be globally disruptive. The question is how disruptive,” he added.
Latin American currencies were this year’s winners, led by the Colombian peso’s 25% advance against the dollar. Jason DeVito, senior portfolio manager at Federated Hermes, expects that regional outperformance to continue.
“We generally see strength in Latin America on strong commodity prices, potentially due to more stimulus from China, and continued success in the Latin American monetary regimes taming inflation,” he said.
