Emerging market stocks closed higher for a second consecutive day, driven by a rally in Asian technology companies and indications that China is preparing to implement further economic stimulus measures.
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The MSCI Emerging Markets Index saw a 0.3% increase on Tuesday, December 24, 2024, amidst light holiday trading. Chinese stocks contributed significantly to this rise, advancing by 1%. While the index is poised for an approximate 9% total return in 2024, it still lags behind developed market stocks, which have generated returns exceeding 20%. The MSCI Emerging Markets Currency Index remained largely unchanged after a day of declines, setting it on track for a 0.5% loss for the year. In contrast, emerging market sovereign and corporate dollar bonds have yielded about 6.5% in 2024, according to a Bloomberg index.
Challenges and Optimism in Emerging Markets
Developing nations face numerous challenges in the coming year, including potential tariff increases by US President-elect Donald Trump, geopolitical uncertainties, and persistent inflation. Despite these headwinds, some investors maintain a positive outlook.
Arnaud Boué, a senior fixed-income portfolio manager at Bank Julius Baer in Zurich, commented on the resilience of emerging markets. “2025 will likely bring volatility, especially with Trump’s inauguration, but EM companies possess strong fundamentals to navigate this uncertainty,” Boué stated. He highlighted the low net leverage for both investment-grade and high-yield companies, coupled with low default expectations, as positive indicators.
Chinese Stimulus and Tech Sector Drive Gains
Chinese markets received a boost from a Reuters report suggesting that policymakers are planning to issue a record three trillion yuan ($411 billion) in special treasury bonds in 2025 to stimulate the slowing economy. This news propelled Chinese stocks higher, pushing their year-to-date gains to over 16%.
The rally in Asian tech stocks also continued, with Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest contract chipmaker, reaching a record high. This performance positions TSMC for its best annual stock performance in 25 years. While TSMC’s shares initially climbed 1.4% on Tuesday, they ultimately closed flat. Alibaba Group Holding Ltd. experienced a more substantial surge, with shares jumping 2.7%.
Currency Movements and Central Bank Actions
The Colombian peso led gains among emerging market currencies, appreciating by 1%. Conversely, the South African rand weakened by 0.7%, impacted by various factors. The South Korean won also declined, influenced by weak consumer confidence data and political developments.
Brazil’s real saw minimal change in light trading following the central bank’s announcement of a $3 billion spot market auction on December 26, aimed at supporting the currency. The Turkish lira gained 0.5% after the government implemented a 30% minimum wage increase for 2025, signaling a shift towards more market-oriented policies under President Erdogan’s new economic team.
Conclusion: Emerging Markets Poised for a Dynamic 2025
Emerging markets concluded 2024 with a two-day rally, fueled by optimism surrounding Chinese stimulus and the strength of the Asian tech sector. While significant challenges remain on the horizon, the underlying fundamentals of emerging market companies and proactive policy measures provide a foundation for potential growth in 2025. Investors will need to carefully navigate the evolving landscape, considering both the opportunities and risks presented by geopolitical factors, inflation, and policy changes in major economies.
