Q1 2024 CIO Review and Outlook

Key Takeaways

  • Natural recovery is taking hold after COVID. Economic growth is picking up and being driven by domestic consumption.
  • Emerging markets are a cyclical asset class. When the U.S. starts cutting rates, many emerging markets’ central banks will in turn be able to cut, in our view, which should prompt a cyclical pickup.
  • We expect the second half of the year to yield slightly better news for China. We think earnings will continue to improve and there will be more initiatives to support the consumer.

At the beginning of the year, we took the view that emerging markets in Asia as well as Japanese equities would perform well but that the first few months would be unsettled. That's largely how it has played out.

China had a very poor start as its economy continued to struggle amid weak consumer sentiment and severe challenges in its property sector. Elsewhere, market performances were contrasting. India, the strongest structural story in emerging markets, in our view, performed well in the quarter but it was overshadowed by a barnstorming Japan. The markets of Latin America, on the other hand, were more volatile, Brazil in particular.

The main reason for our expectations of volatility was related to the global macro environment, specifically expectations for U.S. interest rates. In December, the markets were pricing in 160 basis points (1.60%) of cuts by the Federal Reserve. Those expectations have now reduced to 75 basis points (0.75%). It’s a significant shift and more cyclical markets, like those of Latin America which are exposed to global supply chains, were adversely affected in the quarter. As we look to the remainder of the year, we think this new clarity in the macro environment will cause volatility to dampen and that should be very positive for emerging markets.