Why 2024 Could Be The Year Of The Emerging Market

With economic growth slowing in the developed world and concerns mounting over a possible recession, savvy investors are looking to emerging markets to find outsized returns. Here are a few reasons why emerging markets look highly favorable in 2024. 

Increased Foreign Direct Investment (FDI)

Many emerging markets have experienced robust growth in recent years, in large part thanks to increased FDI inflows. For instance, since the end of the COVID-19 pandemic, emerging economies are the only ones that have been able to truly grow at sustainable rates, with an equal growth rate of 4% in 2022 and 2023. As the IMF has stated, "the slowdown is concentrated in advanced economies."

However, these optimistic projections may be surpassed due to the recent events in the American and European markets over the past few weeks.

Due to the Federal Reserve's and European Central Bank’s pivot towards a looser monetary environment, investing in U.S. and European bonds is becoming less attractive, which means there will be even more of an incentive to allocate to emerging markets.

An important advantage of emerging countries is that they have higher growth ceilings, not only due to macroeconomic factors but also because of an environment more conducive to productivity.

For example, in Europe, the use of genetically modified crops or certain agrochemicals is discouraged, hindering further growth in the primary sector. The same applies to land use and CO2 emissions.

Moreover, in developed countries, the population median age is almost 50 years, which diminishes the ceiling of productivity and growth in macroeconomic terms. This implies greater challenges in scaling the production of goods and services.

In emerging countries, the growth ceilings in key industries such as agriculture, infrastructure, manufacturing, financial services, tourism, etc., are much higher.

Among emerging markets, Colombia emerges as a notable opportunity where infrastructure projects will facilitate an expansion of the productive frontier. For instance, the surge in Foreign Direct Investment (FDI) in this nation is fostering conditions for robust growth, showcased by new infrastructure endeavors like 5G implementation and record-breaking tourism.

One of the clearest manifestations of high growth and demand for higher returns is the evolution of prices in the currencies of emerging markets, which have experienced significant demand over the last year. This is also the case in Colombia, where the dollar depreciated by approximately 20% in the past year.

Political Stability and Good Governance

One of the most frequently cited criticisms regarding emerging markets is their political instability and lower governance quality. However, in recent years, we have witnessed a gradual but continuous deterioration of institutional quality even in the developed countries, evening the playing field somewhat in terms of political risk.

From the distrust of government institutions in the United States to the possibility of a full-scale war in Europe, developed markets face internal and external challenges that undermine their political stability and the legitimacy of their leaders.

Europe especially is experiencing a period of weakness and increasing internal conflict. Despite having found a common "enemy" in Russia, this did not serve to lend legitimacy to governments or to revitalize the eurozone.

As a result, paradoxically, Europe appears more politically and economically risky than many emerging countries like India, Mexico, or Colombia. It's challenging to perceive Europe as a viable long-term investment.

This year, in particular, the elections in the United States will bring volatility. What could be the result of a second term for Trump or Biden? Or the rise of a dark-horse candidate like Robert F. Kennedy JR? Nobody knows for sure, but regardless of the outcome it will be hugely challenging to manage a country in which half the population is diametrically opposed to the other half.

Meanwhile, a significant number of emerging countries are forming new groups in order to increase their influence, stability, and reduce the economic influence of the American dollar. This is the case with the BRICS (Brazil, Russia, India, South Africa), which at the beginning of 2024 welcomed the participation of Argentina, Ethiopia, Iran, and the United Arab Emirates, among others.

Most of these emerging markets are effectively organizing their internal affairs. An example of this is the elimination of inflation. Until the 2000’s, most of these economies suffered from inflationary problems and continuous changes in political regimes. However, this is no longer the case. The high growth rates of emerging markets are reflected in the size of their economies on a global scale.

Commodity Prices

Last but not least, commodity prices are another key reason why 2024 could be the year of the emerging markets. 

If geopolitical conflicts were the key driver of commodity prices in 2022 and 2023, this year, potentially marked by initial rate cuts and a persistently complex geopolitical landscape, holds promise for primary products. These conflicts are likely to continue and to be amplified by macroeconomic factors, especially affecting commodity prices in the agricultural sector.

The Federal Reserve has adopted a strange position, appearing to accept more elevated inflation levels alongside increased economic activity. This dovish stance facilitates price surges in commodities:

• Gold: Currently hovering near historic highs.
• Oil: Up more than 10% since January 1st.
• Agricultural products: The price of food is at record highs according to FAO metrics.

The rise in commodity prices in recent years creates a favorable opportunity for the appreciation of real estate in emerging countries, which are generally high producers of primary goods and raw materials. This holds particularly true for agricultural land, as the price of food tends to increase due to demographic structural reasons.

According to data from the United Nations' Revision of its World Population Prospects, we could see a peak of over 10.4 billion people sometime in the late 2080s.

At the same time, climate change can cause substantial changes in the areas suitable for food production on the planet.

Both aspects have the same effect: they cause uncertain supply and increasing structural demand in terms of food, and a significant appreciation of productive lands in emerging countries.

In light of the ongoing rise in commodity prices and persistently complex geopolitical landscape, Colombia emerges as an emerging opportunity for investors. As a relevant producer of primary goods and raw materials, Colombia stands to benefit from the appreciation of real estate, particularly in its agricultural sector.

As discussed in previous articles, Colombia offers a promising investment landscape for those seeking to capitalize on the dynamics of the emerging markets and the agricultural sector's resilience amidst shifting global trends.

Conclusion

For decades, the economic blocs of North America and Western Europe were the dominant forces in the global market. But now, slow growth in the developed world has investors thinking more seriously about international diversification.

With more room for growth and less market value occupied by speculative assets - not to mention growing infrastructure and expanded connections to markets - emerging market economies are among the most attractive regions of the world.

To learn how you can gain exposure to emerging market assets, get in touch with our staff today. We can help you add the international diversification that you'll need to maximize the security of your portfolio.