Fed’s Rate Cuts, China’s Bazooka Stimulus: Why Emerging Markets Could Shine

The global financial landscape is shifting once again as the Federal Reserve has begun to cut rates, paired with China's renewed economic stimulus efforts. Together, these factors are breathing life back into emerging markets (EM), a space often sidelined during periods of higher US interest rates. With a 50 basis-point rate cut by the Fed and no imminent signs of a US recession, alongside China’s aggressive policy support for its 5% GDP growth target for 2024, it’s time to reassess how investors can capitalize on this opportunity.

Why Emerging Markets?

Fed's Goldilocks Scenario 

The Fed's recent 50bps rate cut, paired with a strong economy that shows little sign of an immediate downturn, creates a "Goldilocks" scenario for EM. As dollar strength wanes and yields become less attractive in the US, capital often flows into higher-yielding EM assets, providing a potential tailwind for these markets. In addition, easier Fed policy provides room for EM central banks – particularly in Asia – to follow suit and support their own growth, which given additional reasons for flows to get diverted to EM assets.

China's Stimulus and Growth Target 

After a period of sluggish growth, China is pushing hard to meet its ambitious 5% GDP target for this year. Several rate cuts and policy measures have been announced, positioning China as the anchor for broader EM growth.

China is planning at least 800 billion yuan ($114 billion) of liquidity support for stocks and will allow brokerages and funds to tap the central bank’s funding to buy equities after the benchmark CSI 300 Index fell to more than a five-year low earlier this month. That came as part of a broad package of policy measures to revive the economy, including a cut to a key short-term interest rate and lower borrowing costs on as much as $5.3 trillion in mortgages. There were other measures to support the property sector as well, including lower minimum down-payment ratio on second home purchases.

As China focuses on reviving domestic demand, many emerging markets with strong trade ties to China—particularly in Asia—stand to benefit.

Markets to Watch

Emerging markets present diverse opportunities across various sectors and countries. For a broad exposure to EM, investors could consider the following:

Broad EM Exposure

Fed rate cuts may ease currency and rate pressure across all emerging markets and help crowded trading themes such as AI broaden out beyond north Asia. Latin America and Southeast Asia remain well positioned to capture the alpha that Fed easing cycles usually generate for emerging markets.

• ETFs to Consider:
  • iShares MSCI Emerging Markets ETF (EEM) - offering comprehensive exposure to emerging market equities.
  • Amundi MSCI Emerging Markets ex China UCITS ETF (EMXC) - focusing on emerging markets while excluding China for a different risk profile.
  • iShares MSCI Emerging Markets Asia ETF (EEMA) – focuses on equities in Asian emerging markets.
  • BetaShares Asia Technology Tigers ETF (ASIA) – targets technology companies in Asia (excluding Japan).
  • iShares MSCI EM Latin America UCITS ETF (LTAM) – provides exposure to key Latin American economies.
  • iShares Latin America 40 ETF (ILF) – providing broader exposure to Mexico and other key Latin American markets.

India

With domestic demand resilience and structural reforms, India continues to emerge as a bright spot in the EM world. Tailwinds from global supply chain diversification away from China further support growth prospects.

However, investors should watch for risks related to upcoming state elections and the implementation of key reforms such as labor and land policies, which could cause market volatility.

• ETFs to Consider:
  • iShares MSCI India ETF (INDA)
  • WisdomTree India Earnings Fund (EPI)
  • iShares India 50 ETF (INDY)
  • Columbia India Consumer ETF (INCO) – targeting India’s expanding consumer market.
  • VanEck Digital India ETF (DGIN) – for exposure to India’s growing tech and digital sectors.
• Single Stock ADRs to Consider:
  • Reliance Industries Limited (RIGD) – a major player in telecommunications and energy, listed in London.
  • HDFC Bank (HDB) – one of India's leading private sector banks, listed on the NYSE.
  • Infosys Limited (INFY) – a top IT services firm, with global clients and listed in NY.

Indonesia 

With a young population, strong consumer demand, and a government pushing infrastructure development, Indonesia is an emerging market with significant growth potential.

Despite its promise, local elections and labor protests could cause instability. Investors should also monitor how the government handles environmental policies and regional power struggles.

• ETFs to Consider:
  • iShares MSCI Indonesia ETF (EIDO)
  • Amundi MSCI Indonesia UCITS ETF (INDO)
  • VanEck Vectors Indonesia Index ETF (IDX)
• Single Stock ADRs to Consider:
  • PT Telekomunikasi Indonesia Tbk (TLK) – Indonesia's largest telecommunications company, listed on the NYSE.
  • PT Bank Mandiri (Persero) Tbk (PPBY) – A leading state-owned bank in Indonesia, traded on OTC Markets.
  • PT Indofood CBP Sukses Makmur Tbk (INDF) – Major food and beverage producer in Indonesia, also listed on OTC Markets.

Brazil

Supported by higher commodity prices, Brazil remains an attractive option, particularly in the energy and agriculture sectors. Moreover, its central bank has been proactive in cutting rates, potentially leading to a strong recovery.

Local political risks include ongoing fiscal debates, corruption concerns, and uncertainty over the effectiveness of economic policies. Political polarization in the lead-up to the 2026 election could introduce volatility.

• ETFs to Consider:
  • iShares MSCI Brazil ETF (EWZ)
  • iShares MSCI Brazil UCITS ETF (IBZL)
  • VanEck Brazil Small-Cap ETF (BRF) – focusing on smaller domestic companies poised for growth.
• Single Stock ADRs to Consider:
  • Petrobras (PBR) – Brazil’s state-controlled oil giant, listed on the NYSE.
  • Vale S.A. (VALE) – a leading global mining company, also listed in New York.
  • Ambev S.A. (ABEV) – a major beverage company, listed on NYSE.

South Africa

South Africa's natural resources and mining sector stand to benefit from rising demand for commodities like precious metals. However, frequent power cuts (load shedding) and political scandals continue to threaten growth prospects.

The ANC's internal struggles and upcoming elections could add further uncertainty, with a risk that policy changes or delays in reforms could hit investor sentiment.

• ETFs to Consider:
  • iShares MSCI South Africa ETF (EZA)
  • VanEck Vectors Africa Index ETF (AFK) – providing exposure to multiple African markets, including South Africa.
• Single Stock ADRs to Consider:
  • Naspers Limited (NPSNY) – a major media and internet company, listed in NY.
  • Anglo American (AAL) – a diversified mining company with a strong presence in South Africa and listed in London.

Mexico

Mexico benefits from its proximity to the US and strong trade relations, particularly as companies nearshore production. This positions Mexico well for future growth, but political risks remain.

Regulatory changes, energy reforms, and nationalist policies could impact market sentiment. Investors should also watch for developments in US-Mexico trade relations, especially under a potential new US administration.

• ETFs to Consider:
  • iShares MSCI Mexico ETF (EWW)
  • Franklin FTSE Mexico ETF (FLMX) – focusing on large and mid-cap Mexican companies.
• Single Stock ADRs to Consider:
  • America Movil (AMX) – a leading telecommunications provider in Latin America, listed on NYSE.
  • Cemex (CX) – a global building materials company with significant operations in Mexico, listed in New York.

Taiwan

Taiwan is at the forefront of technology and semiconductor manufacturing, with firms like TSMC (Taiwan Semiconductor Manufacturing Company) leading the way. The country's strategic position in global tech supply chains offers significant growth potential.

Investors should remain cautious about geopolitical tensions with China and domestic political changes, which may introduce market volatility.

• ETFs to Consider:
  • iShares MSCI Taiwan ETF (EWT)
  • iShares MSCI Taiwan UCITS ETF (ITWN)
• Single Stock ADRs to Consider:
  • TSMC (TSM) – the world's largest semiconductor manufacturer with significant global market share and listed in NY.
  • Hon Hai Precision Industry Co., Ltd. (HNHPF) – Taiwan's largest electronics manufacturer, known for assembling Apple products, traded in NY.

South Korea

South Korea's robust technology and automotive sectors position it well for growth. Companies like Samsung and Hyundai are leaders in their respective fields, driving innovation and exports.

However, investors need to be aware of risks related to North Korean tensions and domestic political issues, which can impact market sentiment.

• ETFs to Consider:
  • iShares MSCI South Korea ETF (EWY)
  • iShares MSCI Korea UCITS ETF (CSKR)
• Single Stock ADRs to Consider:
  • Samsung Electronics (SMSN) – a global leader in technology and consumer electronics, listed in London.
  • SK Hynix (HYNSE) – a key player in the semiconductor industry, listed in Luxembourg.
  • Hyundai Motor Company (HYUD) – a leading automotive manufacturer listed in London.

EM Bonds: A Yield Opportunity

For investors looking beyond equities, EM bonds provide an attractive way to capture yield, particularly as global rates decline. EM central banks will have room to cut rates as the Fed begins its easing cycle, further enhancing the appeal of these bonds. EM bonds offer diversification through local currency and dollar-denominated options, capturing both interest rate differentials and potential foreign exchange gains.

Local Currency Bonds: A Strong Play in EMs

As the Fed cuts rates and EM currencies stabilize, local currency bonds provide an opportunity to gain exposure to both yield and FX appreciation. Countries like India, Indonesia, and Brazil offer solid growth prospects alongside relatively higher interest rates. Asia stands out, given the region's resilience and China’s stimulus efforts bolstering neighbouring economies.

• ETFs to Consider:
  • iShares J.P. Morgan EM Local Government Bond UCITS ETF (IEML)
  • VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC)
  • SPDR Bloomberg Barclays Emerging Markets Local Bond ETF (EBND)
  • WisdomTree Emerging Markets Local Debt Fund (ELD)

Dollar-Denominated Bonds: A Safer Bet

For investors seeking more stability and less currency risk, dollar-denominated EM bonds present a compelling option. These bonds offer higher yields than developed market bonds while limiting exposure to currency fluctuations. Latin American and African countries, such as Brazil and South Africa, feature prominently in this space.

• ETFs to Consider:
  • iShares J.P. Morgan USD EM Bond Fund (EMB)
  • Vanguard Emerging Markets Government Bond ETF (VWOB)

Risks on the Horizon

While emerging markets are positioned for growth, it’s crucial to acknowledge the risks that could derail the momentum:

• Recession Risks: Ongoing global economic uncertainty may lead to slowdowns that affect EM growth trajectories.
• US Elections: Political shifts and potential changes in trade policies from a new US administration could impact emerging market dynamics.
• Risk of Trade Wars: Export-driven markets may be adversely impacted by escalating trade tensions or tariffs, which could disrupt supply chains and reduce competitiveness.
• Continued Sluggish Growth from China: Commodity-producing emerging markets may face challenges if China’s economic recovery continues to be slow, affecting demand for key exports.
• Volatility: Market fluctuations driven by geopolitical events, economic data releases, and central bank policies may introduce uncertainty.