This article summarises a panel discussion featuring Karen Karniol-Tambour, Co-Chief Investment Officer of Bridgewater Associates, Andre Esteves, Chairman and Senior Partner of BTG Pactual, and Uday Kotak, Founder and Director of Kotak Mahindra Bank, at GIC Insights 2023, which took place on 31 October 2023 in Singapore.

Moderated by Liew Tzu Mi, GIC’s Chief Investment Officer for Fixed Income & Multi Asset, the panel discussed how investors and businesses can best navigate the opportunities and risks presented by emerging markets in today’s uncertain investment environment.

Emerging markets have been known to play an important role in investment portfolios. They often offer greater growth opportunities when compared to their developed-market peers1; boast growing, favourable demographics; and hold significant socioeconomic development potential arising from structural reforms.

Although asset prices in emerging markets across equities, fixed income, and private markets have been underperforming over the past decade or so, many investors remain optimistic about their long-term prospects.

In a poll conducted at GIC Insights 2023, almost 40% of delegates shared that their allocation to emerging markets in the next two years would remain unchanged, while over half of them anticipated it to increase over the next five to 10 years.

Until recently, emerging markets have typically been viewed through a single lens due to certain shared characteristics, such as low-to-middle income per capita relative to developed markets2, expanding economic bases driven by resource extraction3, and strong economic growth4, among other traits.

The panel shared that today, however, the asset class is less monolithic. Most are progressing socioeconomically at their own distinct pace and their growth trajectory does not correlate to other emerging markets. In fact, many of them have moved from being low-cost production hubs to thriving consumer markets. Even so, these economies are still exposed to the same market risks as with the rest of the world, which include inflation, rising interest rates, and geopolitical and trade tensions. The cost of capital can be likewise high in certain emerging markets.

Despite these challenges, the panel highlighted that emerging markets have remained resilient in recent years and in some cases, have navigated the uncertain investment environment more successfully than some of their developed market peers.

One reason for this resiliency stems from less reliance on the US dollar when issuing debt. On top of that, there is greater usage of local currencies, which are in less demand globally, making them less volatile and vulnerable to market swings.

Another driver of their resilience is the accumulation of foreign exchange reserves. These reserves have helped to insulate many emerging economies against market shocks, while maintaining fiscal stability. In fact, International Monetary Fund data shows that in 2001, emerging markets held US$793.3 billion in foreign exchange reserves5 and by 2021, these had amassed to US$5.29 trillion6, growing almost sevenfold within two decades.

India continues to play a vital role in global markets. The South Asian nation is a key trade partner to the US, Europe, Russia, and the Middle East, and is positioning itself as a leader in the Global South.

The panel highlighted that in recent years, India has managed to insulate itself from oil shocks, and government spending during the global pandemic has not led to a dramatic increase in fiscal deficit. Inflation is also under control, and improving economics have helped lower the risk premium on Indian Treasuries.

Looking ahead, the country is likely to maintain its fiscal and political stability, according to the panel. Opening up certain industries to overseas investments would greatly benefit the economy, with the most promising growth opportunities likely to be found in the start-up space, infrastructure, and manufacturing.

The panel also agreed that India’s unique investment profile could soon elevate it to the status of a standalone investment destination, rather than being viewed as part of the broader emerging markets pack.

The slowing of China’s economy has been one of the focal points of discussions in the past year.

However, the panel noted that underneath the many headlines on China are numerous developments that continue to make the country an attractive investment destination. The deleveraging of sectors, such as real estate, will likely cause some shorter-term volatility, but it can also make them more sustainable in the long term.

Additionally, they pointed out that China’s economy remains well-diversified and that the country’s asset valuations are well-priced too. The market also holds a significant trade surplus with its overseas partners.

The speakers cautioned investors to beware of the challenges that remain as well, noting in particular that commodities demand and capital flows to and from neighbouring markets remain uncertain for China. Productivity is likewise lower compared to 20 years ago7.

After years of volatility and uncertainty, the market outlook for Brazil is once again positive. The country is delivering higher-than-expected market growth, supported by reforms across multiple industries. In fact, in 2022, the Brazilian economy grew by 2.9%8 , which is a noteworthy improvement on the pre-pandemic economic contractions experienced in 2015 and 2016, when the Brazilian economy contracted by 3.5% and 3.3% respectively9.

Currently, the nation’s central bank, Banco Central do Brasil (BCB), is also in a good position to cut interest rates. Inflation fell from 12.13% in April 2022 to 3.94% in May 2023 and BCB expects inflation to cool further to 3.6% by November 202510.

Moreover, the panel discussed the benefits of the South American nation’s democratic consolidation, including the ability to operate within a free market and maintain independent institutions. This allows investors to invest with little interference from other agencies, such as Brazil’s congress, judiciary, and media. In addition, the country has become a pioneer in industries critical to the global economy, such as agriculture and clean energy.

However, the speakers also noted that Brazil remains vulnerable to cycles, especially political election cycles, where pro-investment policies could be reversed upon a new government coming into power.

The panel concluded that as emerging markets are becoming more idiosyncratic and less correlated to their peers, investors are finding this asset class more and more attractive. Similarly, with increasingly less separation between emerging markets and developed markets, investors have a broader range of investment opportunities than before.

By leveraging different asset classes, varying exposures, and contrasting rates of inflation, not only will emerging markets provide investors with the opportunity to further diversify their global portfolios, they also stand to make these portfolios more resilient and robust.