Conference Presentation, Panel
Emerging Markets Outlook
Milken InstituteDouglas Rediker, Teresa C. Barger, Binay Chandgothia, Binod Chaudhary, Penny Foley, Francisco N. González
- Political risk is projected to expand in relevance beyond traditional emerging markets, impacting investment decisions in nations previously excluded from standard analysis and influencing even developed market economies.
- Emerging markets are anticipated to remain in an early to early-mid-cycle phase with lower vulnerability than in the past, characterized by growth relative to developed markets and valuations roughly half those of the U.S. and Japan.
- A major allocation shift is expected over the next 10 to 20 years as emerging market institutional savings transition from bond-heavy portfolios to balanced approaches, driving capital into equity markets.
- China's GDP share is projected to continue rising for the next decade, exceeding U.S. purchasing power parity levels, while the broader emerging market region shifts toward consumption-oriented economies.
- Diversification strategies are expected to gain popularity as perceived safety in developed markets declines, creating arbitrage opportunities for investors with local knowledge who can identify overstated risks.
- Inflation is forecast to remain relatively low due to negative output gaps in many emerging economies, with a risk-free asset unlikely to emerge for multiple years as global perspectives on sovereign debt evolve.
- A longer-term dollar weakening trend is anticipated, punctuated by countertrend moves where the MFX falls substantially by between 5% and 7%.
- Specific regional developments include a 90% probability of Andrés Manuel López Obrador winning Mexican elections, with global markets expected to have already priced in a continued trajectory regardless of the outcome, and a free trade agreement potentially signed within one and a half months.
- Supply chain risks are expected to stabilize in Mexico, with investments flowing from the U.S., Japan, China, and Europe, potentially allowing Mexico to surpass Germany and the UK as a tourism receiver.
- Domestic savings pools in emerging markets are projected to grow significantly over the last five to 10 years, reducing dependence on foreign flows and prompting the development of local institutions like pension funds.
- Chinese investment is expected to take center stage in South Asia, Africa, and parts of the Middle East, focusing on infrastructure and small and medium-sized enterprises to support deleveraging.
- Total return targets of approximately 6% are projected for funds assuming carry, while technological advancements are expected to create first-mover opportunities in unexplored markets.
- Emerging markets are expected to enter a new cycle lasting nine to 10 years, driven by capital allocation improvements, internal controls, and potential re-rating for companies with superior governance.
- Political leaders will face pressure to deliver economic results to retain power, with anti-corruption movements in countries like Brazil, the Philippines, and India tightening wealth concealment via KYC requirements.
- Unpredictability is expected to be higher in the West than elsewhere, while automotive industry movements are anticipated to shift toward Thailand or Mexico due to CPTPP benefits.
- Raw material exports from Australia and New Zealand, including coal, meat, and milk, are expected to benefit Mexico's economy, with raw material prices remaining strong.
- Financing for new projects is expected to rely on blending traditional banking, funds, and fintech collaboration, while the mindset for investing in emerging markets must shift from highly structured instruments to more entrepreneurial approaches.
- Political leaders in countries like India and Bangladesh are expected to focus on proving delivery to win upcoming elections, mitigating risks to ensure business continuity despite broader unpredictability.