Developed Markets Face Recession – Where Can Investors Turn?

– The economic outlook for developed markets is far from rosy.

– But emerging economies are on track for positive growth.

– The China re-opening effect should provide a tailwind, with services and tourism key beneficiaries.

Developed Markets Face Recession – Where Can Investors Turn?

By Joseph Hill, senior investment analyst, Hargreaves Lansdown.

The world’s advanced economies grew by 2.7% in 2022. The IMF project growth of just 1.3% this year. Further banking stresses, rising defaults or a recession will increase the odds of rate cuts. There has also been an increase in defaults in the US, albeit from a very low level. Many economists are predicting a recession in developed markets later this year – or at the very least flatline growth. In a year where many major developed economies are expected to enter or narrowly avoid recession, is it time for investors to revisit their emerging market allocations?

While emerging markets were the first to be hit by the pandemic, they were also first to emerge from the interest rate rising cycles we’re still seeing in the west. This has put them on a strong growth footing, with a widening gap in expected growth rates over the next few years.

The IMF expect anaemic growth in advanced economies with forecasts of 1.3% for 2023, rising slightly to 1.4% in 2024. However, growth in emerging market economies is expected to dwarf this with 3.9% expected in 2023, followed by 4.2% in 2024. This will be no doubt helped by the China re-opening effect with the rebound likely to be most evident in in-service consumption and tourism as consumers make up for lost time.

As well as faster expected growth, emerging markets already account for 70% of the world’s population and 40% of its economic output. So, there’s boundless potential and plenty of opportunities for investors in emerging markets, but they’re typically higher risk and more volatile than developed markets. This makes them a more adventurous way to try to grow wealth over the long term.

There is a higher risk of nasty surprises, especially in uncertain and volatile times though. This has been seen most recently following Russia’s invasion of Ukraine. Several index giants including S&P, MSCI and FTSE Russell have since excluded Russian equities from their indexes, directing capital flows away from the country.

There are some talented and experienced stock pickers investing in emerging markets which can give investors broad exposure to a range of companies with high growth potential.

3 emerging market fund picks to boost long term growth

JPM Emerging Markets

Managers Leon Eidelman and Austin Forey have plenty of experience investing in emerging markets and draw on a well-resourced team, who are based in eight countries across the globe, for ideas and analysis. The fund provides broad exposure to emerging economies by investing in high-quality companies the managers think can sustain earnings growth over the long term. They buy company shares at a reasonable price and hold on to them as they grow their profits, and hopefully their share prices, over the long run.

Schroder Asian Discovery

Managers Robin Parbrook and Alex Deane invest in smaller businesses based in Asian and emerging markets or that make most of their money in these areas. These businesses offer lots of growth potential, often because they’re using new technologies or developing new and innovative products. They look for companies with good cash flows, a quality management team, superior corporate governance standards and a strong business model that’s able to defend against competition.

Vanguard FTSE Emerging Markets ETF

This ETF offers exposure to a range of large and medium-sized companies in emerging markets, including in China, India and Taiwan, from one of the biggest and best ETF providers in the market. It tracks the benchmark by investing in nearly all the underlying companies of the index, and in line with each company’s index weight. This is known as partial replication and can help the fund track the index closely at low cost.