As 2024 approaches midway, the global economic environment maintains resiliency, furthering expectations for continued central bank easing in the quarters ahead and the path to a relatively soft landing still intact. Despite elevated interest rates, particularly across developed markets, the consensus around rates peaking during this cycle were validated with the first-rate cuts in Europe. The disinflation trend continued, with both headline and core inflation declining from peak levels, as soft global demand supported the easing of commodity prices and goods. For EMs in particular, strong harvests led to lower prices of major crops including wheat, soybeans and corn. However, more stubborn core services inflation, and a rebound in industrial metal prices following signs of optimism around China, threaten the inflation narrative. Furthermore, escalating conflicts in Ukraine, Middle East and the Red Sea could reinvigorate supply chain pressures and derail the trend, however markets remain broadly balanced over spillover risks. Additionally, weather pattern shifts from El Niño to La Niña could have mixed effects on agricultural commodity prices, though will vary based on region.
As one of the busiest electoral years unfolds, results in Indonesia, Bangladesh, Pakistan and Honduras showed continuity, while more tepid endorsements of regimes in India, Mexico and South Africa, led to coalitions forming, creating volatility to markets. With the UK calling a surprise snap election, and the US election to follow, risks to global trade policy, inflation and markets linger. Against this backdrop, global growth is projected at 3.2% in 2024 and 3.2% in 2025, with the 2024 forecast 0.1% higher than previous estimate, with greater resilience in the US and several large EMs particularly India and China.
While the theme of resiliency gains momentum, divergence in policy measures and growth outlook across EMs and DMs persist. For the first time following an unusually synchronised period of global monetary tightening, major DM central banks have started cutting interest rates, with improved visibility around inflation descending towards target. The Swiss National Bank led the rate cutting cycle with a modest quarter point cut in March, which was followed with an equivalent rate cut by the European Central Bank in June. The conversative nature of the cut signals that central banks remain cautious around committing to a particular rate path. This contrasts to the US, where rate cuts are expected to stay high for longer. Conversely, EMs which have front run both the tightening and easing cycle, continued to experience inflation declining, notably in Africa and LatAm, while remaining low in Asia. EM central banks remained agile with Brazil, Chile, and Columbia all extending their loosening in H1. Notable exceptions include Nigeria, Ghana, Argentina, and Egypt, where inflation remains elevated. As we enter H2, EM inflation is expected to move towards target, however central banks will be cautious given the lagged effects of higher US interest rates.
Growth paths across EMs are expected to diverge materially in 2024, with GDP growth expected to accelerate in half of 18 major EM economies, while decelerating in the remainder. Those EMs with greater exposure to the US are expected to outperform relative to those more exposed to the Eurozone or China.
Asia and the Pacific remains a dynamic region, with 4.5% growth projected for 2024, and is on-track to deliver two thirds to global growth in 2024, as it did in 2023. In Southeast Asia, Indonesia, Vietnam and the Philippines continued to experience positive growth rates in Q1, as domestic demand for services remained a primary attributor.
In South Asia, India is expected to be the fastest growing economy in the G20, with 6.8% GDP growth forecasted in 2024. India’s outperformance has been supported by strong domestic consumption, higher capital expenditure fuelled by government spending, and high levels of foreign direct investment.
In East Asia, China’s well defined fiscal playbook supported faster than expected economic growth in Q1, with industrial activity surprising on the upside. This provided relief to a vulnerable property sector facing protracted growth, however, disappointing retail sales and industrial output weighed in on growth.
In sub-Saharan Africa, declining inflation and rising private consumption are supporting a pickup in growth forecasts to 3.8% in 2024, with nearly two thirds of countries anticipating higher growth. South Africa contracted slightly in Q1 owing to contraction in construction, manufacturing and mining sectors, as well as household spending, and despite load shedding easing into Q2. Nigeria’s growth forecast at 3.2% in 2024, is owing to a pickup in trade sectors and services, while Kenya has seen an uptick due to recovery in the agricultural sector.
In LatAm, Brazil and Mexico have been more resilient, while Peru’s growth remains weak due to political uncertainty. Outlook for Chile and Colombia remains subdued as economic reforms remain uncertain while Argentina GDP continues a downward trajectory following the devaluation and reduction in fiscal expenditure in 2023.
The MSCI All Countries World Index maintained positive momentum into Q1 with the index rising 8.2%, powered by US equities which were supported by resilient US growth offsetting sentiment around slower rate cuts, as well as enthusiasm over artificial intelligence. The MSCI EM Index rose by 2.4% in Q1 but was weighed down by weakness in China’s credit and property markets. The US dollar Index has trended higher in 2024 rising 4%, reaffirming expectations of delayed rate cuts. This has led to some volatility in EM currencies, with the Indonesian central bank stepping in to support the Rupiah following declines against the dollar, while other central banks remain on standby.
Private markets continue to remain interesting, with fundraising, valuations and investment activities reflecting an improving environment to deploy capital. Global M&A picked up in Q1, with the US accounting ~60% of deals, with rising energy and power sector deals. While EM M&A values were down in Q1, Asia saw an increase in deal volumes. As the overall outlook improves, IPO markets are expected to broaden liquidity options. In private equity, energy transition investments in infrastructure are gaining momentum while in early-stage venture, climate-tech is also benefitting from the secular trend of decarbonisation. Co-investment opportunities continue to be attractive, while the secondary market continues to hold strong. Private debt continues to benefit from higher interest rates, retreating underwriting banks, and contraction of liquid debt markets. Against this setting, Sarona can play a catalytic role in building early-stage ecosystems, particularly in climate and gender verticals, in line with its Australian Development Investments (ADI) program, as well as support more established private equity companies through the SGGM product line.
Overall, the outlook for EMs remains conducive. As the economic outlook improves, private markets continue to offer value and diversification for long-term investors, particularly in themes such as information technology and decarbonisation. Supportive factors for growth in EMs include earlier monetary tightening by EM central banks, continued disinflationary trends and recovery in exports. Global growth expectations for emerging markets remain higher than advanced economies (4.2% vs. 1.7% in 2024) and (4.2% to 1.8% in 2025) which is encouraging for Sarona’s investment universe. Nevertheless, we remain cautious around prolonged conflict in Russia-Ukraine, an escalation in the Middle East, the consequences from sticky core inflation, a slowdown in DMs and delayed interest rate loosening, and election surprises which could heighten volatility for markets.
