By Anisha Sircar
(Reuters) – Europe’s largest fund manager, Amundi’s investment institute, expects emerging markets (EM) to benefit next year from better economic prospects than developed markets, and as the U.S. Federal Reserve embarks on a rate cutting cycle.
The Fed is likely to begin pivoting to rate cuts in mid-2024, which is “positive for EM”, said Alessia Berardi, head of emerging macro and strategy at the Amundi Investment Institute.
In this scenario, Indian and Japanese equity markets are “relatively” favoured, she told the Reuters Global Markets Forum (GMF).
“With the U.S. slowing down significantly, (the) growth premium in favour of EM is increasing,” Berardi said, predicting a recessionary outlook for the United States in the first half of 2024.
The MSCI emerging markets index has risen 2.8% year-to-date, compared to a 17% rise in the S&P 500.
Asia has been resilient despite a slowdown in China this year, Berardi said, adding that the region offered interesting opportunities as the policy mix there is less restrictive than in other regions.
In terms of fund allocation, Berardi said she was cautious but gradually adding equities with a “preference for quality and growth in the first phase,” focussing on India and Japan.
“Later on, adding more beta or valuation styles,” she said.
Within fixed income, Berardi said her preference was for hard-currency bonds, while adding duration later.
The iShares JPM Emerging Markets Bond exchange traded fund has slipped about 1.6% this year against a backdrop of stubborn inflation and aggressive rate hikes, following 2022’s plunge of 22%, one of the worst years on record for emerging markets.
Calling emerging currencies “strongly undervalued”, Berardi said those with “high carry trade” – the funding of loans and foreign assets by borrowing low-cost currencies – such as the Indian rupee and the Indonesian rupiah were more attractive bets in 2024.
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(Reporting by Anisha Sircar in Bengaluru; Writing by Divya Chowdhury; Editing by Mark Potter)