The global financial landscape is changing once again. The Federal Reserve has begun cutting interest rates, while China is implementing new incentives to stimulate its economy. Both factors have led to improved conditions on emerging markets, which have often been sidelined in times of higher interest rates in the United States. Fed’s rate cut of 50 basis points and the lack of signs of an imminent recession in the US, combined with China’s aggressive policy of achieving a GDP growth of 5% by 2024, have led to a potential evaluation of the situation for investors.
Why emerging markets? An optimal scenario written by the Fed
The latest 50 basis point cut in interest rates by the Fed, combined with a strong economy that shows no signs of immediate slowdown, creates favorable conditions, and a so-called “Goldilocks” scenario for emerging markets. As the value of the dollar falls and profitability in the US becomes less attractive, capital often moves to assets in emerging markets with higher rates of return, giving those markets a boost. The more relaxed policy of the Federal Reserve allows central banks in emerging markets, particularly in Asia, to undertake actions that support their growth, which further attracts capital to these markets.
Stimulating the Chinese economy and a determined growth target
After a period of weak economic growth, China is striving to achieve its ambitious goal of 5% GDP growth this year. This has led to several interest rate cuts and political initiatives positioning China as a pillar of growth across emerging markets. China plans to spend at least 800 billion yuan ($114 billion) to support the stock market and enable brokers and funds to use financing from the central bank to purchase shares. These steps were taken after the CSI 300 index fell to its lowest level in over five years. These measures are part of a broader plan to stimulate the economy, including a reduction in the key short-term interest rate and lowered costs of total mortgage lending to $5.3 trillion. There were also other measures of support for the real estate sector, including lowering the minimum required deposit when purchasing a second home. Moreover, China is focusing on stimulating domestic demand, which has a positive influence on many emerging markets, particularly those with strong trade links with China, especially in Asia.
Markets to Watch
Emerging markets offer diverse investment opportunities across various sectors and countries. To ensure broad exposure to emerging markets, investors may consider the following:
Broad exposure to emerging markets
Interest rate cuts by the Fed could ease the pressure on currencies and interest rates in emerging markets and support the expansion of popular investment themes like artificial intelligence outside of North Asia. Latin America and Southeast Asia are well-prepared to take advantage of opportunities that typically appear for emerging markets during Fed interest rate cut cycles.
Which ETF funds should be considered? iShares MSCI Emerging Markets ETF (EEM) or Amundi MSCI Emerging Markets ex China UCITS ETF (EMXC).
India
India is becoming a more and more prominent player among emerging markets, mainly thanks to strong domestic demand and structural reforms. The fact that global supply chains are becoming more diverse and deviating from China in other directions also improves growth prospects for India. However, investors should be cautious; the upcoming state elections and key reforms, such as changes in labor and land regulations, could introduce volatility in the markets.
Which ETF funds should be considered? iShares MSCI India ETF (INDA) or WisdomTree India Earnings Fund (EPI), iShares India 50 ETF (INDY). Which single-stock ADRs are worth considering? Reliance Industries Limited (RIGD) and HDFC Bank (HDB).
Indonesia
Indonesia is an emerging market with a large growth potential, driven by a young population, strong consumer demand, and government initiatives for infrastructural development. Whilst prospects look promising, local elections and workers’ protests can introduce instability. Investors should also pay attention to how the government deals with environmental protection policies and regional tensions.
Which ETF funds should be considered? iShares MSCI Indonesia ETF (EIDO), Amundi MSCI Indonesia UCITS ETF (INDO) and VanEck Vectors Indonesia Index ETF (IDX). It is also recommended to pay attention to single company ADRs, such as PT Telekomunikasi Indonesia Tbk (TLK), or PT Bank Mandiri (Persero) Tbk (PPBY).
Brazil
Thanks to rising raw material prices, Brazil remains an attractive option, particularly in the energy and agricultural sectors. Additionally, the country’s central bank actively lowers interest rates, which could spur a strong economic revival. On the downside, budget debates are ongoing in the country, there is a high level of uncertainty about the effectiveness of economic policy and corruption risk, and political polarization ahead of the 2026 elections could lead to additional market fluctuations.
Which ETF funds should be considered? iShares MSCI Brazil ETF (EWZ), iShares MSCI Brazil UCITS ETF (IBZL) and VanEck Brazil Small-Cap ETF (BRF). In addition, attention should be paid to single company ADRs, such as Petrobras (PBR) and Vale S.A. (VALE).
South Africa
South Africa stands to benefit from increasing demand for resources such as precious metals, with its rich natural resources and mining sector. However, frequent power supply disruptions and political scandals are still a threat to development prospects. Internal ANC conflicts and upcoming elections could introduce additional uncertainty, posing a risk that policy changes or reform delays will adversely affect investor sentiment.
Which ETF funds should be considered? iShares MSCI South Africa ETF (EZA) and VanEck Vectors Africa Index ETF (AFK). Additionally, single company ADRs such as Naspers Limited (NPSNY) and Anglo American (AAL) should also be taken into account.
Mexico
Mexico benefits from its proximity to the US and strong trade relationships, which are especially important as firms move production closer to America. This puts Mexico in a good position for future growth, but political risks remain. Changes in regulations, energy reforms and nationalist policies can affect market sentiment. Investors should also keep a close watch on the developing trade relations between the US and Mexico, especially in the event of a change of administration in the US.
Which ETF funds should be considered? iShares MSCI Mexico ETF (EWW) and Franklin FTSE Mexico ETF (FLMX). It is also recommended to check single company ADR listings, such as America Movil (AMX).
Taiwan
Taiwan is a leader in the tech industry and semiconductor production, with companies such as TSMC (Taiwan Semiconductor Manufacturing Company) playing a key role. Thanks to its strategic position in global technology supply chains, the country has significant growth potential. However, caution should be exercised due to tensions with China and political changes within the country, which may introduce market volatility.
Which ETF funds should be considered? iShares MSCI Taiwan ETF (EWT) and iShares MSCI Taiwan UCITS ETF (ITWN). It is also recommended to pay attention to single company ADRs, such as TSMC (TSM).
South Korea
South Korea has strong technology and automotive sectors, providing good growth prospects. Companies such as Samsung and Hyundai lead their industries, driving innovation and exports. However, investors should be aware of the risks associated with tensions with North Korea and domestic political problems that may affect market sentiment.
Which ETF funds should be considered? iShares MSCI South Korea ETF (EWY) and iShares MSCI Korea UCITS ETF (CSKR). Attention should also be paid to single company ADRs such as Samsung Electronics (SMSN).
Emerging Market Bonds: A Chance for Profit
For investors looking for alternatives to equities, emerging markets (EM) bonds present an attractive option to generate income, especially with decreasing global interest rates. Central banks in emerging markets will have room to cut interest rates when the Federal Reserve begins its easing cycle, thereby increasing the appeal of these bonds. Emerging market bonds offer diversification through options denominated in both local currencies and US dollars, enabling one to benefit from differences in interest rates as well as potential currency gains.
Local Currency Bonds: Strong Position in Emerging Markets
As the Fed lowers interest rates and currencies in emerging markets stabilize, bonds in local currencies offer the chance for profit from interest as well as the increase in value of currencies. Countries like India, Indonesia, and Brazil have good growth prospects and relatively high interest rates. Asia stands out amongst other regions thanks to economic stability and China’s stimulatory action which supports neighboring economies.
Here are a few ETF funds offering exposure to emerging market bonds in local currencies that might present an attractive option for investors seeking profits in these regions: iShares J.P. Morgan EM Local Government Bond UCITS ETF (IEML), VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC), SPDR Bloomberg Barclays Emerging Markets Local Bond ETF (EBND) and WisdomTree Emerging Markets Local Debt Fund (ELD).
Dollar-Denominated Bonds: A Safer Option
For investors seeking greater stability and less currency risk, dollar-denominated emerging market bonds are an attractive option. They offer higher yields than government bonds from developed markets, while limiting the risk associated with currency fluctuations. In this category, Latin American and African countries like Brazil and South Africa stand out.
Which ETF funds should be considered? iShares J.P. Morgan USD EM Bond Fund (EMB) and Vanguard Emerging Markets Government Bond ETF (VWOB).
Risks on the Horizon
While emerging markets do have growth opportunities, it is important to recognize risks that could disrupt this growth including:
– Recession Risk: Global economic uncertainty could lead to a slowdown affecting the growth potential of emerging markets.
– US Elections: Political changes and possible US trade policy shifts by the new administration could influence dynamics in emerging markets.
– Trade Wars: Export-oriented markets could suffer from escalating trade tensions or tariffs disrupting supply chains and reducing competitiveness.
– Continuing Slowdown of China’s Economy: Commodity-producing emerging markets may face challenges if China’s economic recovery continues to be slow affecting demand for key export items.
– Volatility: Market fluctuations caused by geopolitical events, releases of economic data, and central bank policies can create uncertainty.
By Charu Chanana, Managing Director of Currency Strategy at Saxo Bank.
Source: https://ceo.com.pl/obnizki-fed-i-bodziec-stymulacyjny-chin-dlaczego-rynki-wschodzace-moga-zablysnac-13922
