Growth and interest rates that previously favored the dollar “are now peaking and shifting towards the ex-US universe,” stated Kandhari, deputy chief investment officer and head of macroeconomic research for emerging markets at the New York-based firm. “The overall macro fundamentals look promising” for emerging markets, she shared with Bloomberg News.
Despite a period of underperformance, Kandhari maintains her view that the 2020s will be the “decade of emerging markets.” The MSCI Emerging Markets Index has risen 11% this year, lagging behind the S&P 500, which has increased by 20%, marking the sixth consecutive year of underperformance as of September 24. This has brought the ratio between the two indices to its lowest point since the 1980s when emerging markets were first recognized as a distinct asset class.
“I remain optimistic,” said Kandhari, whose firm manages $1.5 trillion in assets. “I believe this is the asset class for this decade.”
On Wednesday, the MSCI benchmark EM equity index climbed for the fifth consecutive day, reaching its highest level since April 2022.
For years, interest rate differentials between the US and other regions have favored the US, as the Federal Reserve tightened policy more rapidly and fiscal stimulus from Washington resulted in growth advantages for the US and the dollar, Kandhari noted. She suggested that 10-year Treasury rates around 4% would create a favorable environment for emerging-market assets.
Central banks in emerging markets, which had previously been “just trying to monitor the Fed,” will feel less pressure to maintain high rates after the Fed’s recent moves, she added.
In her managed fund, the Passport Overseas Equity Portfolio, investors have outperformed the benchmark with a 13% return in 2024 as of September 24. However, they would have fared even better in the US, where the “Magnificent Seven” tech stocks—Nvidia Corp., Apple Inc., Microsoft Corp., Amazon.com Inc., Alphabet Inc., Meta Platforms Inc., and Tesla Inc.—have surged by a third this year.
Kandhari acknowledged that developing equities have delivered “underwhelming relative returns at the aggregate index level” this decade due to the war in Ukraine and the rise of US shares associated with artificial intelligence.
Optimistic on India
Kandhari continues to favor Indian equities but is not increasing her exposure. India’s benchmark Sensex index has surged 18% this year. “The India story has strong potential,” she said, anticipating more foreign investor purchases. “The flow data in India from foreign investors has been quite disappointing; domestic investors have been the primary drivers of liquidity in the equity market.”
She also holds positions in “pockets of Southeast Asia” and is positive on Eastern Europe, where EU funding supports equity performance. Select assets in Latin America also appeal to her.
However, she remains cautious about the outlook for China. The benchmark Hang Seng index experienced a 4% spike on Tuesday—the largest increase since March—following the central bank’s announcement of a comprehensive stimulus package, which included interest rate cuts and liquidity support for stocks. The index continued to rise on Wednesday.
“The structural trend in China is still negative,” she pointed out, citing excess debt and capacity in the economy that are creating deflationary pressures and “keeping a lid on nominal growth.”