Looking into 2024, CIO expects both fixed income and equities to deliver positive returns globally but believes investors should focus on quality given the wide range of possible outcomes. (UBS)

In the next few months, we expect global economic growth to slow, many developed market central banks to follow emerging market peers that have begun to cut interest rates, and politics to play an outsize role. The US presidential election, the Israel-Hamas and Russia-Ukraine wars, and the US-China rivalry all have the potential to affect markets. Simultaneously, a wide range of industries look likely to deepen their adoption of generative AI tools, driving gradual productivity enhancements. In our view, emerging markets play a key role in this evolving global economic and geopolitical order.


Asia: At the center of the new order
China, the region’s largest economy, has consistently underwhelmed expectations this year. It seems like economic activity has found a bottom in July thanks to more proactive fiscal and monetary policy measures. Overall, we think China’s new equilibrium GDP growth stands in the 4–4.5% range for the coming years, down from over 8% in the past decade and over 10% in the early 2000s, as the economy digests property sector overinvestment, demographic headwinds, and a noisier relationship between the government and the private sector. This still means China’s GDP per capita could double to around USD 25,000 by 2035.
India, for its part, is solidifying its role as an investor darling, thanks to the reasonable expectation that it should deliver annual GDP growth of roughly 6% over the next few years. This growth should be driven by favorable demographics and human capital trends; productivity-enhancing reforms bearing fruit; and the country’s position as “geopolitical swing state,” which affords it the opportunity to avoid picking sides and pursuing its interests with flexibility.


More broadly, several Asian economies have benefited from a redirection of investments in nearshoring trends, including Thailand, Vietnam, and Indonesia. Between 2010 and 2022, these countries along with India have seen their share of global foreign direct investment flows grow considerably.


Latin America:Beneficiary of a new world
Latin America enjoys relative peace, an abundance of in-demand natural resources, and a stock of human capital and infrastructure that makes it a desirable investment region in this new world. That said, lingering political uncertainty, weak governance metrics, subdued business sentiment, and scarce appetite for productivity-enhancing reforms represent key headwinds.


On aggregate, however, we think the region is poised to grow modestly faster than its pre-pandemic pace, with important differences under the hood. Our outlook is brighter for the region’s heavyweights. Brazil is the lone active reformer in the region and is becoming the barn of the world thanks its wealth of commodities, while Mexico remains the obvious beneficiary of nearshoring by its neighbors to the north. The picture for the Andean economies looks more challenging as unstable political dynamics in these countries will likely continue to curb new investment. A most complex macroeconomic picture awaits the incoming administration in Argentina, and the recent easing of US sanctions on Venezuela is a necessary yet insufficient condition for an economic turnaround.


Central and Eastern Europe, the Middle East, and Africa: A mixed picture, heavy on conflict
It’s difficult to give an overarching economic message for this region commonly labeled CEEMEA—the dynamics are simply too diverse. Some countries like Poland and South Africa should see their economies expand further next year—due to improving private consumption for the former, and better electricity availability for the latter. But Türkiye and Egypt, for example, should see weaker growth as monetary policy will likely become tighter to address economic vulnerabilities.


That said, the Damocles’ sword of conflict unfortunately hangs over the region. The Israel-Hamas war risks spreading to the Middle East at large, though regional and global actors are making huge efforts to prevent this from happening. Meanwhile, Ukraine will go into its third year of fighting with Russia in February, and there seems to be no viable path to negotiations in sight. The war’s direct market impact has faded with the rerouting of Russian oil and gas, but its indirect impacts continue to reverberate through military budget expenditures, crude oil supply management, and the broader reorganization of the global geopolitical map.


Investment implications
Looking into 2024, we expect both fixed income and equities to deliver positive returns globally, but believe investors should focus on quality given the wide range of possible outcomes.


Bonds remain our preferred asset class in global portfolios, and we see well-diversified emerging market fixed income exposure as desirable. Current yields are around 9% and 8% for sovereign and corporate bonds, respectively, and we expect the asset class to deliver healthy total returns in our base-case scenario over the next six to 12 months. For investors with a preference for individual issuers, selectivity remains essential as higher default rates should be expected in a low-liquidity environment.


As for stocks, we believe the outlook for emerging market equities in the year ahead is more constructive than that of some developed markets such as the UK. Emerging market companies look set to deliver solid mid-teens earnings growth in 2024, while still trading at a sizable valuation discount to their developed market peers, which we don’t think is justified.


A new world will inevitably mean complexity and volatility, but also opportunity to grow wealth. By building a plan using the Liquidity. Longevity. Legacy. framework,* and getting in balance through a globally diversified multi-asset portfolio with emerging markets exposure, investors should be well positioned to navigate it.


*Time frames may vary. Strategies are subject to individual client goals, objectives and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.


Main contributor: Alejo Czerwonko


What to do next:

Read the full report Investing in Emerging Markets: Emerging markets in the new world 15 November 2023.


Visit the Year Ahead 2024 landing page and read the full report Year Ahead 2024: A new world.


Listen to the podcast: Top of the Morning: Emerging Markets in a New World