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Stephen Rudman: Good morning, my name is Stephen Rudman. I'm a member of the Ashmore New York-based US distribution team. I would like to welcome and thank you all for joining Ashmore's 2024 Emerging Markets Outlook. Gustavo Medeiros, Ashmore's Global Head of Research, is going to be leading the conversation. 

Gustavo, as always, thank you for preparing your thoughts and joining us. I'm going to turn it over to you to share the 2024 outlook. 

Gustavo Medeiros: Well, thank you very much, Stephen for the kind introduction, as always, and thanks everybody for dialling in. We have prepared our 2024 Outlook document, which should be published over the next couple of days. The title is: “Resilience, Tails, and Inflections’. So we’re going to go through those themes today.

The first theme is resilience. The fact is that global gross domestic product (GDP) growth has slowed down, as many expected, but with no recession, and Emerging Market (EM) GDP growth has been extremely resilient, in our view. 

EM GDP growth improved over last year by 0.2% if the consensus expectations for 2023 get confirmed. This is despite the fact that developed world GDP growth has decelerated, and if you look at the consumer price index (CPI) inflation from 2022 to 2023, you can see that inflation in EMs started the year at lower levels and decelerated further. Inflation in the developed world has been declining quite quickly and actually, we believe, is probably going to be revised to the downside at the end of 2023, given the more recent prints, but has been relatively elevated compared with EM. 

So, this macro stability is quite impressive, and looking forward to 2024, the consensus is that this stability, this resilience, will likely remain. GDP growth is also likely to remain at around 4% in EM, with Chinese GDP growth slowing down a little bit at the margin, but EM Asia ex China improving. 

Overall, GDP growth in EM Asia remains relatively resilient. In Latin America, GDP growth is likely to slow down very marginally next year, but GDP growth should accelerate in Eastern Europe and in the Middle East and Africa. Therefore, we have very similar growth forecasts, whereas next year GDP growth is likely to half again in the developed world. That's going to lead to the second consecutive year where the EM growth premium increases, in our opinion. 

There are many reasons and factors behind this resilience, but one of the key ones is macroeconomic stability. Emerging markets implemented much less aggressive rate hiking, and much less aggressive fiscal expansion during the Covid crisis, and was much faster at consolidating their fiscal deficits compared to the developed world. Also, in terms of monetary policy, we've had very little in terms of 'helicopter money', as these fiscal expansions weren't funded by central banks, and moreover, central banks in Emerging Markets started to hike policy rates much earlier than in the developed world. So this resilience is explained by the policy stability.

Again, just as a reminder, this year we've had many events. 10-year US Treasuries hit 5%, the dollar tried to rally at some point – although  we are down on the year-to-date basis on the dollar index. Chinese sentiment remained relatively weak. Nevertheless, despite all that, we've had a pretty decent performance across many asset classes. In EM local currency bonds, for example, it’s been the second consecutive year of outperformance compared with global fixed income. EM high yield is doing pretty well and EM equities have been relatively resilient again, up year-to-date despite the negative sentiment in China. 

The second theme of the 2024 outlook is inflections. Here, the first inflection that really matters for the asset class is when we will get an inflection in earnings per share in terms of EM equities. The growth differential in EMs have increased quite significantly for the first time since 2009. With a one-year lag, typically, EM stocks outperform developed world stocks as a result of higher EM growth expectations. 

One of the reasons EM stocks have not performed well so far is precisely the fact that earnings per share have remained relatively weak. So, we're monitoring when we are going to get a rebound on earnings per share. One encouraging element is, if you look at Korean and Taiwan exports, typically, that has a leading factor to global manufacturing purchasing managers’ indices (PMIs) and over the last two to three months, Korean and Taiwanese exports have been surprising to the upside quite significantly. We've been pointing it out in our research, but the export data from Korea and Taiwan vis-a-vis the earnings per share on the technology sector of the MSCI EM index, which is about 20% of the MSCI today, we can see there's also a leading relationship here. In other words, exports from Korea and Taiwan typically lead technology earnings, and that's going to be an important inflection in our view when, eventually, EM earnings per share stabilise and rebound. We think the rebound of the manufacturing sector is one of the important catalysts in 2024. The other one is Chinese sentiment rebounding or stabilising, and investors starting to get more allocations with China, and Chinese investors adding exposure to stocks themselves. 

The other inflection that is important is that of the dollar. We've been alluding to the fact that the dollar probably peaked in 2022 for a while now, and the dollar tried to go higher again during the summer as US Treasuries sold off, but over the last couple of months, we've seen the dollar selling off again.

There's a number of elements suggesting the dollar peaked in Q3 2022, and therefore we entered in a bear market environment for the dollar. If that's the case, and if earnings per share inflects in Emerging Markets, there could be two very powerful catalysts for a convergence between EM stocks to the developed world. 

There has been a very strong divergence between US stocks in particular and MSCI EM stocks since 2009, and you can see the valuation gap has been at the widest levels in history, and US stocks remained at extremely overvalued levels despite the fact that a non-profitable part of the stock market has been declining, or has been suffering quite significantly, in our view. Therefore, we think that these catalysts of EM earnings per share improving, and the dollar turning will be quite important ones to monitor for a potential outperformance of EM equities compared to the US stock market in 2024. 

Our third outlook theme is about tails. There are many tails that we can talk about, but after the most aggressive hiking cycle since the 1980s, global inflation has declined quite significantly, initially led by the manufacturing sector, but more recently, service sector inflation has been slowing down quite strongly as well. 

So, if you look at what is implied by interest rates, the market is now suggesting a weighted average probability of around five cuts from here until the end of January 2025. 

In our view, broadly speaking, there are tail risks either there is no recession because we had yet another leg of fiscal expansion in the US, for example, the resilience of the labour market keeping the economy afloat, or the US Federal Reserve (Fed) eventually having to cut policy rates by a much larger extent than what's priced in, because of, eventually, the credit cycle playing out.

We're already seeing in the weakest links of the credit market (for example, European corporates, Scandinavian corporates, and commercial real estate across many places in the world) that default rates on the high yield part of these asset classes have been picking up over the last months and quarters. Therefore, against that environment, typically, you have monetary policy easing, but if we do get a cycle of monetary policy easing, we think the Fed is likely to cut rates by more than what is priced in the market at the moment. 

Therefore, we're calling for 2024 to be a very good year for bonds and a very good year for carry, in our opinion, so one of the tails that investors can take advantage of is the tail of more cuts being implemented than are currently priced in. That  could actually take place in a benign environment to the extent that the Fed has quite a lot of room to cut policy rates, the European Central Bank has a lot of room to cut policy rates, and central banks in EMs have even more room. This could mean that even if credit markets start to deteriorate or continue to deteriorate from here, there's quite a lot of room for policy easing.

The other tail is pertaining to the election calendar which will be very busy in 2024. Countries representing close to 52% of the world population, and 51% of global GDP, will have elections in 2024, and election years are years where equity returns are not typically super bullish. 

There is a little study that we've done, where since 1928, you typically have only about 5% returns on average on every single election year since 1928, whereas in a non-election year, you get slightly more than 10% total returns. On average, you get around 7.5% returns on the S&P 500 within this time period. So, quite clearly, there is a seasonality here, and a bias towards lower returns during election years.

We know that elections bring some uncertainties, and therefore some tail risks as well together with that, but elections could also be connected to the inflection element. We've seen the elections in Argentina just two weeks ago leading to a massive change in the political spectrum. A far-right candidate winning the election in Argentina brings the potential for a very strong front-loaded fiscal consolidation in Argentina. If that takes place, it's going to be the first time since Peronism that we're going to have a very strong fiscal consolidation front-loaded with an attempt that will provide a very important anchor, allowing for much better monetary management and therefore more macro stability. 

We don’t think this will  be easy, and  could be quite a painful transition for Argentinians, but it's just an example of elections leading to a potential change in an economic environment, and a change in policy that could be quite relevant for investors. 

Just looking at the elections scheduled for 2024, we have an election in Taiwan on 13 January that's going to be very important to the extent that it could lead to some further geopolitical noise in the Taiwan Strait. Elsewhere in Asia, we have elections in Pakistan most likely at the beginning of February that are going to be important to monitor as well. 

In Indonesia, on 14 February is going to be the first round, then, elections in Russia and Türkiye in mid-March and the end of March, respectively, with Türkiye being local elections. We have a number of elections that are noteworthy, the big ones to monitor obviously the European Union (EU) elections and the elections in the US. Those can bring big changes in global policy and could lead to a number of impacts across different countries.

We intend obviously to keep updated around the developments and around our views as the scenario unfolds, but there is a brief short summary of the state of play on each of these elections, on the big relevant countries in 2024, in the main outlook document. 

So, those are the prepared remarks that explain our main topics, our main themes. Resilience, when it comes to Emerging Market resilience and when it comes to the asset class performing quite well. Tails, the possibility of tail risks and what is actually the different sides of the tails that are priced, that are implied on the market pricing in interest rates that have a very high likelihood of playing out, and potential inflections. The one that I would love to see is earnings per share in EM, and EM stocks inflecting higher. We’ve had many elements suggesting that it can take place, including a rebound of manufacturing out of Taiwan and Korea, including a potential stabilisation of China, but also the dollar peaking and starting to decline.

Stephen Rudman:  Gustavo, most excellent. We have a few questions here, one on crude oil, and the question is if you can give an update and a forecast. Additionally, the question suggests OPEC would probably like to keep prices high, whereas the US would like to keep prices lower, particularly with their initiative to refill the Strategic Petroleum Reserve (SPR). 

Gustavo Medeiros: First and foremost, crude oil prices are dependent on global demand and global economic activity, and the global economy has been slowing down, and therefore demand for crude has been, at the margin, softening up. OPEC+ has been reacting to this lower demand by cutting production. 

If we do get a stronger slowdown at some point in 2024, OPEC has, in the past, flooded the market during recessions in order to lower prices quite significantly and by more than would have happened otherwise, squeezing low cost producing countries and companies, and therefore regaining market share on the rebound. 

So, this reaction function from OPEC is going to be an interesting one to monitor, and I think it will be very important for this cycle. As the question points out, on the surface, it looks like OPEC is trying to engineer higher oil prices, but I think that OPEC has simply been responding to a softer global economic activity that has been playing out at the margin and responding to demand. There is a geopolitical bigger picture game at play here, but I think it's hard to pinpoint how all those things will evolve and will play out. 

The strategic oil reserves in the US have been depleted. Nevertheless, production in the US has been increasing quite significantly. It's also important, and that has had that important spill-over effect to some EM countries. For example, the US has lifted the sanctions on oil exploration and mining exploration and investments in Venezuela, and has lifted sanctions on the Venezuelan secondary market as well. 

That allowed for a massive gap in Venezuelan bonds that were trading at extremely distressed levels, and, importantly, has been leading to a flurry of announcements of investments in Venezuelan oil and gas production. I think that shows some of the elements that were asked here, but the big picture here is that in the very long term, we are in an environment of resource scarcity. The geopolitical risks increase supply shocks, and you therefore have to think about oil and commodities in general as asset classes that can have more volatility to the upside and the downside. But it has to be said that when thinking about 2024, the picture as we've seen in terms of global growth, is one of declining global growth initially. And against that backdrop there are risks of credit accidents that we discuss in the outlook as well. Against that backdrop, I wouldn't be surprised if we do get a short-term decline in oil prices below the levels that OPEC has been signalling they're comfortable with.

Stephen Rudman: Awesome. Thank you. We're going to combine a couple of questions because I think they may go together well. Can you share your outlook on Latin America, both drivers and risks? An additional question which maybe you can weave in: what do you think about Latin America relative to Asia fixed income and equity? 

Gustavo Medeiros: Absolutely. So, first interesting point to make is that Latin American GDP growth in 2023 is going to be much higher than people expected at the beginning of the year. The consensus, for example, for Brazilian GDP growth at the beginning of the year was below 1%, but the Brazilian economy is likely to expand by close to 3% in 2023.

So, in 2024, economists are expecting a modest slowdown in Latin America. I think that the risks are, again, biased towards the upside. Why? Several countries in Latin America have already started to ease monetary policy, including Brazil, Chile, Peru. Meanwhile, we think several other countries, including Colombia and Mexico, are likely to start cutting policy rates within the next quarters. Latin American monetary policy has been tightened very, very aggressively, and real interest rates in the region are among the highest levels of real interest rates in the world. We believe that explains why Latin American local currency bonds, have been performing extremely well; they offer high carry. They also offer better fundamentals than people expected in terms of growth, and Latin American central bankers, as a result of their proactivity, have controlled inflation earlier. So, again, we consider this to be a pretty good package overall. 

In the equity space, we believe Latin American stocks are still extremely undervalued. We wrote a piece in August where we were comparing the earnings per share yield premium that you get. So, the inverse of the price-to-earnings (PE) ratio with the yields on the 10-year government bond. That was motivated by the fact that, if we look at US stocks, the earnings premium today is below T-bills. So, therefore, quite a lot of investors have been saying, what's the point of buying stocks if you can get higher return on T-bills? And I expect Latin American stocks to offer a pretty poor earnings premium over their one and 10-year government bonds, but the data actually does not tell that at all. Latin American stocks are so depressed in terms of valuation, the earnings yield is even higher than extremely high levels of nominal interest rates across many high-yielding countries in Latin America.

So, I think that valuations are still very undemanding, and there was a big trend within the last few years of investors divesting from the EM asset class, or in some cases actually giving up on some parts of EM and investing in EM Asia instead of buying broader EM strategies. I think in the big picture, that's likely to be a strategic mistake, because the Latin American economy almost compliments the Asian economies. Latin America, broadly speaking, has commodity exporters. Mexico will benefit from friendly shoring away from China on the manufacturing side, and the entire South America commodity-producing countries provide some diversification away from the major Asian manufacturing producers and manufacturing countries that are also importers of commodities, in our view. I think that there is room for Latin American fixed income local bonds to keep on outperforming. I think you have a lot of optionality in hard currency debt in Latin America. Argentina and Venezuela are two very obvious examples of that, but you also have that value on the likes of Colombian hard currency bonds. Some quasi-sovereign bonds in the region are also very interesting. In the EM equity space, I think that, again, there's quite a lot of value here. So, I wouldn't say buy LatAm over Asia, but I think that you want to have a balanced exposure across your portfolio, and depending on the sector, you might want to have some pretty big positions within Latin America.

Stephen Rudman: Excellent. I'm going to also combine a couple of more specific questions on the debt side here. What are your current views on default rates for 2024? Any views on potential downgrades in the BBB bucket? And then additionally, which bonds should perform well, governments versus corporates? USD or in local currency? 

Gustavo Medeiros: Okay, quite a lot in there to unpack. I think that, again, as we discussed, the risks around the tails – a more aggressive cutting and easing cycle than what is priced in, or a much less aggressive cycle – are relatively elevated, and I think that, perhaps for the next couple of months, the market will have a little bit of volatility since the perceived Fed pivot, or since inflation started to decline on an accelerated pace over the last two months. Both language from the Fed and the ECB turned a bit more dovish as well, so investors have been very fast to start pricing in cuts, and we've seen quite a lot of headlines coming overnight that are bringing 10-year US Treasuries low, quite quickly. So, 10-year Treasuries hit 5% at some point and I think hit 4.32% at the lowest levels this morning. Typically, what leads US Treasuries to decline that sharply is either that economic growth is declining faster, or is typically associated with some credit events as well at the margin on the weakest links. What typically triggers that is when interest rates try to rise again at the top end of the range. So, I wouldn't be surprised if we do get a bit more volatility than what it looks like at the moment. I would be surprised if it would be a one-way process, but, overall, 2024 is going to be a good year for you to own bonds because, again, when the Fed eases, it's more likely that they're going to cut at least 150 to 300 basis points, and that compares quite favourably to what is priced in at the moment. So, it's a good year for bonds. That's the first message. 

Now, in 2023, we've been advocating within the hard currency space for a barbell between investment grade bonds and the distressed part of the asset class. We've been pointing out there's a very large group of countries, almost 20 countries in the Frontier Market space, where bonds were trading at very distressed levels, implying a high likelihood of default or in some cases, countries that already defaulted and are negotiating to restructure the debt. 

That call is actually a pretty decent one. The CCC part of the Emerging Markets Bond Index (EMBI) is up more than 30% year-to-date, and we have stories like Venezuela, where the bonds are up more than 100%. I think that's still a pretty decent portfolio to have a barbell between high-quality investment grade bonds and the distressed part of the asset class. 

If you look within the single B space, the higher quality single B names are trading at relatively tight levels of credit spreads and are therefore a little bit more exposed to any air pocket in global growth, or any potential credit event that may take place. 

So, again, where distressed names are really trading, it's going to be dependent on what happens on the debt restructuring process with the likes of Sri Lanka that just announced an official debt restructuring today, for example, as well as Ghana and Zambia. The outcome of Argentina, for example, is very encouraging, and, again, Venezuela is another interesting turnaround story that we've been monitoring quite closely. 

Within the investment grade space, I think EM corporate investment grade offers tremendous value across all scenarios, simply because you have lower duration and higher yield. Corporate investment grade might look a little bit tight when you look at it in terms of credit spreads – trading at around 190 basis points over US Treasuries, which is tight compared to the last 20 to 25 years of history. But yield-to-maturity at 6.3% is actually quite attractive, and I think that investors ought to be thinking about yields, because that's what is going to be one of the key total return components. 

So, in other words, when you're buying investment grade bonds in Emerging Markets, you have much higher exposure to global interest rates than to credit spreads at the moment. 

And within the investment grade space, I think corporates are very interesting and offer a better carry to risk return, just higher interest rates with lower duration than the sovereign and investment grade space. Finally, the other point we mentioned in our outlook in 2023 was that local currency bond returns were above hard currency bonds across all scenarios that we painted, and that actually took place. Local currency bonds outperformed hard currency bonds for the second consecutive year. In the 2024 outlook, there are scenarios where local currency underperforms, but we still see many more scenarios where local currency bonds outperform hard currency bonds, and considering one of the inflections that I mentioned – the dollar pivoting and the dollar moving from after peaking in 2022 – moving to a bear market within the next eight years. I think then, local currency bonds should actually offer very good total returns. 

We wouldn't be surprised to see double-digit returns at the end of the year in local currency bonds. You can also see a few scenarios where in the EMBI Global Diversified (GD) index, hard currency sovereigns delivers double-digit returns. All that needs to happen is for the 10-year US Treasury to decline, and within that, global growth does not collapse at the same time. So, that would be something akin to a soft landing taking place, and credit spreads tightening together with lower US Treasuries. That is not typically how these correlations work. Typically, if US Treasuries are coming down, credit spreads are widening, but there are circumstances in which this combination can happen, and a number of sell-side research has been pointing out we can have double-digit returns on the EMBI GD. Again, we wouldn't be surprised if that takes place. 

So, in a nutshell, you have very high total returns, equity-like returns, on offer across the board in EM debt, and I think that investors that are keen to diversify their exposure away from the dollar should absolutely be considering local currency bond allocations. But investors that are more conservative should think about corporate investment grade first and, within sovereigns, thinking about a barbell between high-quality investment grade and high-quality BBs with the distressed part of the asset class. 

Stephen Rudman: I think you answered a couple of other questions that I don't have to ask, so I think that was helpful. We have a question asking for a straightforward outlook on China real estate. We know it's been an ongoing issue for the EM global bond space. Your thoughts there?

Gustavo Medeiros: It's been a very challenging sector and one that the Chinese leadership has been keen to address, but they've tried to address it with piecemeal measures throughout 2023 that have proven to be too soft or too little, too late, in our view. Now, over the last couple of weeks, we had some announcements that were quite interesting. There is hearsay that there was a list of 50 developers, the so-called ‘white list’, that were put in place, and banks were encouraged to increase lending for these developers in order to allow for the sector to recover and for the developers to build the houses that were sold but not finished.

It's a first signal that potentially points that Beijing is serious about the problem. There's going to have to be a lot of investments and a lot of money and a lot of encouragement for M&A in the sector to turn this ship around, and I think that the signal coming from the Politburo pushing for the banks to lend to a large number of developers is an important one. At the end of the day, the end users, the buyers of property, not only in tier one cities, but also tier three and tier four cities, need to feel encouraged that if they go to a developer and buy a new house, they're going to get that property within the time horizon. At the moment, the sentiment is not there. There is still quite a lot of delays in the construction process resulting from the liquidity crisis that have been engulfing the sector for about 18 months. 

The entire sector trades at very, very distressed levels. It's not unusual to find companies trading at two to three cents on the dollar (97%, 98% lower than their face value). So, we think this is an environment that is prime and ripe for consolidation, for some large players and some state-owned players to acquire smaller players. If this comes together with a liquidity injection for the sector, then it could be a decisive step to address the problem, and I think Beijing is keen to address that because it's been starting to weigh quite significantly on economic activity within the last quarters. 

We did have some recovery in the sales of tier one cities, but that did not feed through. It fed through somehow in tier two cities, but not in tier three and tier four cities. So, I think Beijing wants to normalise that situation. As a reminder, in the long term, the big picture, China needs to have a functioning real estate sector. China's urbanisation rate is still below 70%, which is very low by EM standards. There's also a very large amount of houses that are basically unliveable, so-called shanty towns, and some of the announcements and the push for lending were precisely to renovate these older houses. I think that actually could have quite a lot of development or quite a lot of money starting to flow to the sector. So, in a nutshell, it's been a much, much, much slower sector to adjust than I/we would hope for. We were cautiously positive about that, but the caution was guaranteed. It's been taking longer than a lot of people assumed, but we think that, again, Beijing is keen to steady the ship and we think that most likely in 2024, towards the end of the year, we're going to have a very different environment than we have at the moment.

Stephen Rudman: Let's see if we can do a few of these last questions quickly. This one may be a bit more difficult. With respect to EMD, what should investors make of the current challenges surrounding the Zambian restructuring, and to what extent may this portend further challenges for other defaulters? 

Gustavo Medeiros: I mean, when you think about the defaulters and the restructuring process, you've got to really think about it on a case-by-case basis, right? There are no two restructuring cases that are exactly the same. You have to think of which creditors are involved. China being a key creditor has had a significant impact. What is the composition of the private creditors? What is the relationship with the International Monetary Fund? And what is that sustainability looking like within that country? What are the policies that a country would be ready to implement post that restructuring? These are the key questions that matter, in our view. 

One thing that is important to remember is that countries that are in the default situation are basically cut out of international debt capital markets, and confidence is relatively poor in local capital markets as well. So, they have a strong incentive to restructure the debt and finding a deal that actually works for bond holders, for multilateral creditors such as the IMF, and other official creditors such as China, as it is in the primary interest of these investors. 

There has been a number of countries making progress in this direction this year. Sri Lanka has been one of the most successful ones. Zambia and Ghana have been making progress,. Overall, I think things are evolving more or less as we expected, and as we discussed, there has been a lot of value to be taken from these distressed situations to the extent that, typically, investors get far too negative and the final sellers on the countries around the default, or just before and just after the default, typically happens at pretty low levels. That may bring and may present some opportunities. So that's what I was referring to in terms of the optionality.

Stephen Rudman: All right. Excellent. Quick hits on these. One: is it too early to think about equity flows in Argentina? You know, obviously, with the election just happening.

Gustavo Medeiros: I think it's too early because you need to have a functioning foreign exchange (FX) market that is free, which equity investors are going to be acutely aware of, can they bring money to Argentina at the right FX rate? At the moment, you have a multi-tier FX market in Argentina, the official rate is around 350-380, but the parallel rate has been close to 1,000. So, we can get an idea of the massive gap between there. There is a possibility for investors to buy American Depository Receipts (ADRs) in Argentina, and I think that some early investors might take advantage of that. Therefore, you might have some early flows there, but for large flows to come to the equity market in Argentina you need a liberalisation of the capital account and a stabilisation of the monetary system. The first precondition for all of that is a front-loaded fiscal adjustment, and to regain confidence.

Stephen Rudman: Excellent. As a follow-up to that, do you have any EM countries on the equity side that you think look super attractive, or is it more broadly looking at the underlying fundamentals of the individual companies relative to growth, etc?

Gustavo Medeiros: I think the entire asset class is extremely attractive, and we've been pointing this out. Trading is very distressed. It's trading at a very discounted valuation to other global equities. What it's waiting for is, as I mentioned, earnings to start surprising to the upside, but if you do a scenario analysis in terms of total returns on MSCI EM, and if you do a symmetrical scenario analysis of earnings per share in line with expectations for the end of 2024, price to earnings in line with the average over the last 20 years, and dividend yield in line with expectations, we're talking about potentially 17% total returns by the end in 2024.

The downside analysis is for a 10% decline on earnings, and price to earnings 2.5 points lower than the average. So, at 10 times earnings only, you'd have 15% downside in 2024, but if you do symmetrical upside, with earnings per share increasing by 10% and a PE ratio moving from 12.5 to 15 times, then we're talking about 54% total returns in 2024.

So, you can see that the upside-downside is skewed to the upside. There are a number of factors that suggest we're going to have an inflection in earnings. What is tracking relatively cheap today? I would say China is tracking very cheap. A number of EM, Asian countries ex China are relatively cheap as well. Latin American stocks are, again, extremely interesting and attractive from a valuation perspective. So those are spaces that I'm monitoring very carefully. I would say India, Indonesia, Thailand, those were stock markets that had delivered extremely positive long-term total returns within the last 10, 20 years, and I think that's going to remain the case. I see India and Thailand are trading at slightly more expensive levels of valuations, but they have very important and interesting long-term return drivers that we've been writing about and talking about quite a lot. So, those are strategic overweights for many investors that I think have relatively strong hands. It's just that, on the companies and the countries that are trading at very distressed levels of valuations, an inflection and a re-rating higher, will lead to quite extraordinary total returns. From my observations the first leg of the relief rally typically is very, aggressive, and this is an inflection that we're keen to capture.

Stephen Rudman: All right. Two last questions. One is a follow-up on the debt side. Any particular local currencies that you think seem to be particularly undervalued that may be attractive as we head into 2024?

Gustavo Medeiros: Latin America has been one of the stories that have been undervalued and attractive, in our view. Year-to-date, for example, the best performing currency among the major currencies in the world is the Colombian peso, particularly if you look on a carry adjusted basis. Perhaps not because people were tremendously excited about Colombia, but simply because the administration of Gustavo Petro did not manage to implement almost anything from his more populist leftist agenda, and that's been a bit of a theme across Latin America. So, a very high level of real interest rates, a very high level of carry, and a high carry to volatility ratio, and relatively undervalued currencies remains the case. 

Now, Eastern Europe is starting to look attractive as well, to the extent that you do have a potential positive tail risk for Eastern Europe. There was a better election cycle in Poland, where we had the far-right party losing the majority in the parliament. Poland’s President is still dragging his feet and trying to postpone the more balanced administration in Poland. The presidency still belongs to the far-right, but I think that's an interesting inflection in terms of direction of policy. 

You can have a potential massive positive catalyst in Europe eventually once there is a ceasefire in Ukraine and the reconstruction flow to Ukraine starts to take place. It always feels premature to talk about those things, but this is something that could evolve in 2024 a bit more favourably. So, that's the story that we're monitoring.

It's important to highlight that the euro has not rebounded significantly since the ECB moved its policy from negative interest rates to now a very high level of real interest rates, and currencies from Eastern Europe and the euro itself therefore still have quite a lot of upside. Asia is a place where currencies have a much lower beta, but, again, Asian currencies were on the back foot throughout the majority of 2023 because the Japanese yen was completely destroyed throughout the year.

Japan was the only central bank in the world that kept a negative interest rate policy, and they kept yield curve control until just a couple of months ago. Against a backdrop where the Fed and the ECB were hiking quite aggressively, the Japanese yen was depreciating, and that put a lot of headwinds on the Chinese currency, on Malaysia, on Korea, on quite a lot of these Asian large manufacturer producers that are competitors and part of the same supply chain of Japan, but trade within this time zone. I think that there are opportunities there, but there are lower beta countries, currencies that have lower carry on their bonds as well. You didn't have the same inflationary pressures in Asia therefore Asian central banks did not hike policy rates as much. So you have higher potential total returns in my view coming from Latin America and from Eastern Europe. Eventually, dare I say, there are an interesting turnaround, story in Türkiye, which is too early to play, but post-elections Türkiye has been implementing an important number of economic reforms that eventually could lead to an opportunity there. South Africa has also been relatively weak, and could be an opportunity depending on how things evolve, particularly around elections. So, a number of stories there, Stephen.

Stephen Rudman: All right, final question: do we think that high debt and fiscal deficit in the US potentially represents a longer term issue for EM relative to potential higher financing costs? Could it damage growth rates in EM if we do have a US 'higher for longer' interest rate scenario?

Gustavo Medeiros: Yes, look, I think that is primarily a problem for the US. At some point the fiscal deficit will have to be addressed because it's too large of a problem today to be left alone. But I don't think it's going to be addressed in 2024.

In my 2023 outlook, I said I thought the US would do a big fiscal consolidation post mid-term elections, and that was actually a big mistake I made, because the US did a fiscal expansion instead. That was actually positive for growth rather than a negative vector for growth. Now, I think it's very unlikely that we're going to see a very strong fiscal consolidation in 2024, although I could be wrong again. 

Now you have a different composition on the House, and I think that, at the end of the day, debt's going to be one of the factors leading to the weakening of confidence from foreign investors in the US capital markets – the fact that the US is going to eventually have to either hike taxes or cut expenditures or both. At the end of the day, that is going to hurt the returns of American companies, right? The US procyclical fiscal policy since Trump came to power was a boom for the return on equities in the US Inc. space. So, if the US has to adjust its fiscal accounts, I believe that's going to be the opposite. 

Now, if they don't adjust the fiscal accounts, you're going to have an inflationary issue at the end of the day. Because if a country is keen to run a fiscal deficit of 6-7% of GDP when that GDP is above 100%, quite simply, the lever that they have left is for interest rates to go to negative levels in real terms, so that the debt-to-GDP trajectory doesn't become explosive. That's going to be a major negative event for the dollar if it takes place. I would hope that we're not going to go there, but it's something that is important to monitor for sure, particularly when it comes to the policy decisions post-elections in 2024.

I think it's going to be more relevant for the 2025 outlook, therefore. What matters for Emerging Market countries, I think, is to maintain their policy independence, to maintain their fiscal policy conservativeness, and to maintain monetary policies that are independent. The fact that EM central banks were hiking policy rates in the first half of 2022, and then in the first quarter of 2022, and only two quarters later, the Fed started calling inflation transitory shows that EM central banks have gained enough confidence and autonomy, and have a, quite frankly, very good, strong technocrat, bench that has outperformed the developed world central banks in the last cycle.

if that remains in place, I'd much rather have more EM exposure vis-a-vis the developed world, because then, obviously, those are currencies that are well anchored by fiscal policy and monetary policy, and therefore should retain value in a much better shape. 

This is particularly the case if some other parts of the fundamental story start to play out, friendly shoring starts to bring more capex to EM ex China, for example. That could lead to higher potential GDP growth in EM. That's a pretty important story we're monitoring. There is a number of structural reforms across Brazil, India, Indonesia, Türkiye, some of the reforms that we mentioned, and some of these debt restructurings that we're discussing, are bringing structural reforms as well. Those typically lead to higher indigenous GDP growth, so I wouldn't be surprised if we're looking at an era of higher GDP growth, and, therefore you want to have more allocation to EM, essentially, even if the US remains more irresponsible in its debt management.

Stephen Rudman: Oh, that's fantastic. Thank you so much, one, for your initial remarks, and diligently working your way through a very long list of questions. I think we covered them all. With that said, the written version of the 2024 outlook should be published by the end of the week. Everyone who has registered will receive that, as well as our normal subscriber distribution list. So we look forward to seeing that in its full form. Moreover, if there are any further questions, feel free to reach out to your Ashmore representative. I know Gustavo is more than happy to address those on a specific basis. With that said, again, Gustavo, thank you so much, and to all who attended we'd like to wish all a happy holiday season. 

Gustavo Medeiros: Thanks, everyone.