Morgan strategist James Lord and others wrote in a report that as the Federal Reserve cuts interest rates and the U.S. economy avoids a hard landing, the bank expects emerging markets to have another good year, but does not expect it to be smooth sailing.
Following three weeks of client meetings, here are eight surprises that could roil markets in 2024, strategists say: Either a surprise or a scare.
1- Emerging market sovereign credit returns fall to 0% in 2024: U.S. Treasury yields will rebound to 5% by the end of 2024, driving the yield differential with emerging markets to 450 basis points and erasing positive returns . "Given that this happened a few months ago, this scenario should not be difficult to imagine," the strategists noted.
2-Local currency bonds beat sovereign bonds in 2024: Morgan Stanley expects returns on emerging market hard currency bonds to be 14% next year, compared with 8% for local currency bonds. However, if emerging market currencies rise, local currency bonds could outperform, but this would require the U.S. economy to avoid a hard landing, growth in Europe to pick up, and growth in China to improve, boosting commodity prices.
3- The scale of capital inflows in emerging markets: Although capital inflows may still be "sluggish", strong total returns and "interest rate cut cycles triggered by soft landings" may cause the scale of capital inflows to exceed market expectations, thereby promoting stable returns for a longer period of time .
4-Egypt restructures debt: “Given sufficient reserves to service upcoming external debt obligations in 2024, any restructuring is likely to be a pre-emptive move. Relatively high and rising interest expense to revenue ratio heading into 2025, It could force the authorities to suffer early (shortly after the election) and reorganize.”
5-Production in Panama: Elections next May could lead to the reversal of the decision to close First Quantum Minerals' Panama copper mine, helping economic growth and avoiding a potentially costly arbitration award.
6-100% return on Argentina’s debt in 2024: For Argentina’s debt to achieve this result, it needs a very supportive external environment and domestic adjustments to be perfectly advanced. Javier Milley was sworn in as president on Sunday, promising to eradicate inflation through shock therapy with deep cuts in public spending.
7- Saudi Arabia cancels all production cuts: Saudi Arabia has shouldered the majority of global production cuts this year, hurting its economic growth and fiscal balance. This is now beginning to affect Saudi Arabia's ability to spend on Vision 2030 reforms, potentially putting pressure on the government to increase crude oil production.
8- Colombian peso outperforms emerging market currencies again: “While Morgan Stanley remains bearish on the Colombian peso and has been highlighting that valuations look quite expensive, given high spreads and some degree of correlation with local currency bond inflows , we have been hesitant to short the currency.”
9-China increases direct support for private enterprises. As China's policy changes, the "Third Plenary Session" of the Central Committee of the Communist Party of China may become an opportunity for the mainland government to send a stronger signal of support for the economy, including more direct support for the private sector, the establishment of a centralized lending program, and the provision of credit to qualified real estate developers.
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Morgan strategist James Lord and others wrote in a report that as the Federal Reserve cuts interest rates and the U.S. economy avoids a hard landing, the bank expects emerging markets to have another good year, but does not expect it to be smooth sailing.
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