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September 28, 2023

Emerging Market Equities Are Well-Placed to Outperform

After two years of underperformance, there was great hope as 2023 commenced that this would be the year where emerging market equities would outperform their developed market peers. The re-opening of the Chinese economy late in 2022 and expectations of an early end to higher interest rates in the U.S. were key reasons for this hope. However, the Chinese economic recovery faltered, and the Fed continued to push rates higher throughout the first half of the year. Despite these headwinds, emerging markets ex China were still able to record a return of 9.0% during the first eight months of the year (MSCI Emerging Markets ex China) — not bad if one considers that large cap U.S. stocks ex the “Magnificent 7*” returned 8.4% over the same time period.

Looking forward, we see several reasons to be more constructive on emerging markets, including China, and an increased likelihood that emerging market equities could outperform developed market equities over the medium term. The troika of headwinds for emerging markets – higher inflation, higher U.S. rates and a higher U.S. dollar – are peaking, with some early signs that inflation is already turning. With expectations that U.S. rates are close to their peak, the strong rally in the U.S. dollar is also likely to run out of steam before the end of the year. Although neither U.S. rates nor the U.S. dollar will necessarily turn into tailwinds (i.e., lower rates and a weaker U.S. dollar) during the next six months, the removal of the troika of headwinds is critical to emerging markets. Historically, it has been very difficult for emerging market assets to outperform in an environment of higher inflation, increasing U.S. rates and an appreciating U.S. dollar.

Economic growth differentials between emerging market and developed market economies are expected to widen again in 2024, led by stronger growth in Asia, while the U.S. is battling a slowing economy — the so-called soft landing in the U.S. Expectations of a widening growth differential are also reflected in earnings expectations, with emerging market earnings expected to increase by double digits in 2024, compared to single-digit earnings expectations for developed market companies (19% vs 8%, according to JPMorgan).

China remains by far the biggest player amongst emerging markets, and it would be difficult for emerging markets as a group to outperform their developed market peers if the economic recovery in China fails to gain momentum. Whether this materializes during the next quarter or two will depend on policy decisions in China. We are encouraged by policymakers that have already introduced a number of small measures to start addressing problematic areas in the economy, including the property sector, consumer and private sector confidence, and local government debt. However, even taken together, the measures of the last few months fall short of a definitive turning point, and hence investors’ indifference to these measures. However, and this is key, the change in and direction of policymaking is very clear: to provide additional support to stimulate the economy. We believe this trend will continue, and more help/stimulus should be forthcoming in the near term, pushing the economic recovery back on track for around 5% growth in 2023. Better-than-expected earnings in Q3, as a result of the economic recovery gaining momentum, might well be the trigger for investors to re-engage Chinese equities.

Lastly, positioning into emerging markets remains light compared to the last decade, and relative valuation has become very attractive.

With the above in mind, we are positioned for a mild acceleration in the Chinese economy and for continued strong growth out of Asia. We are overweight China, Indonesia and India. Though Latin America is also an overweight in the fund, we have a more defensive tilt in the region, with an overweight in Mexican consumer staples. Large holdings in the fund include TSMC, Samsung, Tencent, Alibaba, Grupo Banorte and Femsa.   

*Apple, Amazon, Facebook, Google, Microsoft, Netflix, Tesla


Emerging markets were expected to outperform their developed market peers in 2023, however higher inflation, rising U.S. interest rates, an appreciating U.S. dollar, and a false start to China’s economic recovery created unexpected headwinds. As these challenges are considered to be close to their peak, their correction should also bring about ideal conditions for emerging market equities to strengthen. Emerging market earnings are expected to greatly outpace developed markets in 2024, bolstered by China’s forthcoming stimulus.

About the Author

Matthew Strauss

Matthew Strauss, CFA

Senior Vice-President and Portfolio Manager – Global Equities
CI Global Asset Management

Matthew Strauss, Vice-President, Portfolio Management and Portfolio Manager, has more than 20 years of investment experience, specializing in emerging market assets including equities, fixed income and currencies. Mr. Strauss joined Signature in 2011 to, amongst other things, oversee the emerging market equity mandates. As the portfolio manager for these mandates, he is also responsible for providing macroeconomic, country and sector strategies and allocations. He is also a member of the Signature Asset Allocation Committee and until 2020 was also responsible for the currency overly of all Signature funds. He has extensive international experience, having worked as Chief Strategist at the largest retail bank in Africa and as Senior Fixed Income and Currency Strategist at RBC Capital Markets. Mr. Strauss holds the Chartered Financial Analyst designation, a Bachelor of Commerce degree and an MA in Economics from the University of Stellenbosch, South Africa.


The opinions expressed in the communication are solely those of the author(s) and are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed. This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication. Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies.

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what CI Global Asset Management and the portfolio manager believe to be reasonable assumptions, neither CI Global Asset Management nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

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