Capital Market Assumptions
Key Highlights:
- Over the next decade, emerging markets (EMs) are likely to bring substantial opportunities for global investors
- EM returns are likely to be higher over the next decade than in the past
- Monetary easing in the US is an important catalyst for the start of the valuation normalisation cycle in EM
Emerging markets shape a new world order
The rise of the Global South means that major emerging markets (EMs) are increasingly influential in shaping the new world order. China’s share of global exports, for example, is rising, increasing the importance of Chinese supply to the world economy. EMs are also key producers of the minerals needed for the energy transition. The economic consequences are that inflation and interest rates will likely settle at higher than pre-Covid rates. However, EMs are now less vulnerable to US monetary policy, a development that investors should acknowledge in their strategic allocations.
EM expected returns appear “higher for longer”
EM interest rates (on average) and EM returns are likely to be higher over the next decade than in the past. While higher cash rates boost total returns, risk premia specific to the asset class are also attractive for a number of EM assets. Find out why the combination of high cash rates and risk premia indicate an income and capital gain opportunity.
Possible end of US exceptionalism
In the medium term, we think there are strong grounds for optimism that EM can disconnect from fluctuations in the dollar liquidity cycle. This reflects various factors, including expensive valuations and large US deficits. Find out which EM currencies are likely to benefit the most, and which four currencies are likely to miss out over the next 10 years in terms of expected returns.