- Investors are starting to weigh risks and opportunities in emerging markets differently, delegates at the World Economic Forum in Davos heard on Thursday.
- Sentiment is shifting away from the risk-off mentality that investor shy away from emerging markets in recent years, to a more positive outlook.
- Investors are starting to see value even in emerging markets that aren't growing rapidly.
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The global investment tide is turning in favour of emerging markets, delegates at the World Economic Forum in Davos heard on Thursday, with JSE CEO Leila Fourie believing that SA is set to be one of the beneficiaries.
Last year was brutal for riskier assets, as the war in Ukraine sent a shockwave through markets, and the MSCI ACWI, a broad gauge of developed and emerging markets, closed almost 20% lower. Countries like India and Turkey bucked the trend, however, with the former recording 6.9% GDP growth for 2022 and the latter expected to reach at least 5%.
Fourie and other members of a panel discussing emerging markets on Thursday said three elements are driving the positive sentiment, including hopes that the US Federal Reserve will be able to moderate the pace of monetary policy tightening as inflation eases.
"We've now come out of a confluence of very serious problems, which devalued or created very negative valuations and a risk-off attitude towards emerging markets," said Fourie.
Even though the consensus is that the US will experience a softer landing instead of a recession, expectations are that it will only record growth of around 1.8% this year, which would be harmful to the dollar and drive investment flows to the emerging markets, she said.
Brazilian billionaire André Esteves said another contributor to this positive sentiment was a shift of many emerging markets from being a growth story for investors, to being a value-for-money one. Bonds and shares in these countries are undervalued, he said.
When the growth story moved from emerging markets to US technology companies in the past few years, those growing developing markets suddenly took the backseat in investors' minds, he added. But this has changed.
"We are in a transition. We had the 15-year growth-driven investment story that is shifting to a value story. Emerging markets didn't perform much, currencies didn't perform much, but when you look deep into valuations, you have a very good yield offering," said Esteves.
President of the Confederation of Indian Industry, Sanjiv Bajaj, pointed out that emerging markets are far more accustomed to high inflation and high interest rates, and are therefore more able to weather current conditions. He expects the economies of emerging markets to grow at twice the pace of developed countries in 2023.
In October, the International Monetary Fund (IMF) projected a 3.7% GDP growth for emerging markets and other developing countries in 2023., while it expects advanced economies to grow by 1.1%.
Unfortunately, SA isn't expected to grow like other emerging markets. The IMF forecasted a 1.1% GDP growth, and that was before the current bout of load shedding.
But more positively, some markets, like Russia and other parts of Eastern Europe, have become unfeasible for investment. SA is also more likely to attract investors looking for fiscal discipline, as it is one of countries whose sovereign debt position looks better than before the pandemic.
"South Africa is in a much better position now than prior to the pandemic," said Fourie. "Of course, over the recent past, with the rising dollar, the debt levels have increased. As we come into what would hopefully be a soft landing and the dollar devalues, that will, of course, provide some relief," she added.
Fourie told the conference delegates that SA was also in an advantageous position as geopolitical tensions continue to affect the supply chains of many products. SA, as a member of the BRICS bloc, has kept trade ties with Russia, while it is also a net exporter of food, offering the prospect of another boost.
"Those countries that are less dependent on gas – and SA, in this instance, is more dependent on coal for energy on a relative basis – will likely gain. And so will oil exporters, many of whom are in emerging markets," said Fourie.