South Africa

South Africa losing its emerging market shine

South Africa down

The South African economy has underperformed significantly compared to developed economies and other emerging market economies in 2023.

At the recent ‘Investing in the Dragon’s Den – Emerging Markets Outlook 2024’ seminar, Prescient and RisCura aimed to educate and inform South African investors about the opportunities and risks of investing in emerging markets.

RisCura’s investment strategist, Glenn Silverman, said that, despite subdued performance in 2023, he was optimistic that emerging markets could see an upswing in 2024.

“Emerging markets have materially underperformed over the past decade and have been in a very sour spot for a long time,” he said. 

“Looking at the MSCI Global Indexes for emerging markets versus developed markets, we can see a very strong inverse correlation between the US Dollar Index and emerging markets.”

He explained that, typically, when the dollar strengthens, emerging markets underperform, and when the dollar weakens, emerging markets rally. 

In addition, currency weakness in most key emerging markets has significantly impacted emerging market underperformance. 

However, once the US cuts its interest rates as expected later this year, the dollar is expected to weaken, which should boost emerging market performance.

Silverman added that a further driver of developed market out-performance over the decade has been their much stronger growth in earnings.  

A consequence of the strong out-performance by developed market indices is that they now trade at a near 40% premium – on average – to that of the emerging markets, which is unusually expensive.

RisCura investment strategist Glenn Silverman

“Looking at inflation, we saw it pick up significantly across the globe post-Covid, but then start to fall fairly sharply in 2023, both in developed and emerging markets,” Silverman said. 

“That will allow interest rates to be cut during 2024.” 

However, emerging markets will need the US Federal Reserve to cut first or risk a further weakening of their currencies.  

“So, once the US cuts its interest rates this year, we should see an improvement in the performance of emerging markets, both from a rating, as well as from a currency perspective, i.e. a potential ‘double whammy’,” he said.

Silverman highlighted the performance of four key emerging market currencies from a South African investor perspective – the Indian rupee, the Brazilian real, the Chinese yuan and the South African rand. 

All, bar the yuan – a managed currency – had depreciated sharply over the decade. 

From an MSCI Emerging Market perspective, China now makes up 25% of the emerging market index – down from a peak of 42% pre-Covid.

In contrast, South Africa now makes up a mere 3% of the basket – down from 6% in 2023 – highlighting its significant underperformance, especially in USD terms.

Silverman also highlighted India’s dramatic outperformance of China since around 2021. 

The significant re-rating of India makes it appear expensive compared to China. 

“Even more noteworthy, though, has been the even more significant under-performance of Chinese tech vs US tech stocks over that same period,” he said. 


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