Emerging and frontier markets - Overview

In the second quarter of 2024 financial markets were significantly influenced by elections in emerging markets and the EU, as well as a hawkish turn in monetary policy guidance from the U.S. Federal Reserve (the Fed) and the European Central Bank (ECB). Entering the third quarter of 2024, we are cautiously optimistic. July is traditionally marked by positive seasonality and reasonable returns, but French domestic politics is a bit of a wildcard. Further out on the horizon, the U.S. presidential election on November 5 awaits with volatility likely to rise.

Q2:24 in hindsight

In the US stock market, April saw a temporary sell-off triggered by a hawkish repricing of U.S. monetary policy, but thereafter, the market only moved upward. The S&P 500* Index set record after record in the second quarter, increasingly driven by mega-tech hype, raising questions about how representative the index is of the underlying economic situation.

In Asia, China stood out in the central government’s increasing focus on the struggling Chinese real estate market. The central administration announced several measures aimed at completing unfinished housing projects, many of which have been paid for up front, and eased restrictions on minimum down payments. The resulting significant speculative buildup in Chinese copper inventories later lost momentum as end-user demand failed to materialize.

For the key emerging market (EM) indices, EMBIGD* and GBIEMGD*, April brought a downturn in tandem with the development in the U.S. stock market and the reassessment of the prospects for cuts in the Fed funds rate to just 42bps by year-end (from 157bps at the start of 2024). The dollar- denominated portion of the EM bond universe performed well thereafter, but several local markets faced political headwinds, with election results in South Africa and Mexico causing particular volatility.

In South Africa, the African National Congress (ANC) lost its majority in parliament as its support collapsed to 40.2% from 57.5% in the 2019 election. Against the odds, the ANC and the market-friendly Democratic Alliance agreed to settle previous rivalries and form a coalition with two smaller parties, the Inkatha Freedom Party and the Patriotic Alliance.

In Mexico, Claudia Sheinbaum and her Morena party won a landslide victory much larger than expected, leaving many investors concerned about political priorities and the checks and balances of Congress.

Turning to India, President Modi and the Bharatiya Janata Party (BJP) won the election, but support was far below what exit polls had suggested. Consequently, Modi and the BJP have to rely more heavily than before on the National Democratic Alliance, potentially slowing the pace of reforms.

Back in the Eurozone, the ECB delivered a highly anticipated rate cut in June and since then policy makers have cautioned not to expect back-to-back cuts. The EU parliamentary elections had a significant impact on market sentiment, as France's National Rally party, led by Marine Le Pen, gained substantial support and President Macron in response called early parliamentary snap elections, which sent EUR/USD down and French yields up.

EM outlook and strategy

Regarding the French election, we believe in a "hung parliament" and a more pragmatic and cooperative approach from Le Pen, which should help alleviate concerns about fiscal discipline and neglect. The U.S. presidential election is not yet "top of mind" with investors, but as Q3:24 progresses, the likelihood of increased volatility rises.

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