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After a sluggish performance in 2023 for emerging markets equities, AGF Investments Inc. forecasts that 2024 will see a drastic improvement in the region’s returns.
Regina Chi, the firm’s vice president and portfolio manager for emerging markets in Toronto, says China’s slowdown caused the asset class to underperform, but notes that there’s good reason to think a resurgence is in order this year.
Globe Advisor spoke with Ms. Chi recently about the performance of other emerging market countries and risks on the horizon. (All performance numbers are in U.S. dollars, effective Dec. 29, 2023.)
China’s growth didn’t recover fully from the pandemic in 2023. Why do you believe things will improve this year?
We were overall optimistic about China’s recovery last year after three years of its self-imposed, draconian lockdown. However, we learned there was a consumer confidence issue related to the deep scarring from the pandemic and those lockdowns. Fast forward to today, the government, which doesn’t want to continue being overly reliant on fixed asset investments, has been stimulating with fiscal and monetary policies to boost the economy, although clearly not enough.
At the same time, China’s government has been talking about increasing its fiscal deficit and planning an urban redevelopment, and we think that’s going to be supportive for 2024 when gross domestic product (GDP) should be around 5 per cent. We note that GDP for 2023 was also around 5 per cent in real terms.
Based on that information, we think this will be the year for China to have a more sustainable recovery. This is a cyclical slowdown, not a structural one, and we believe we will continue to see more stimulus that’s going to shape the recovery for 2024.
China makes up 30 per cent of the emerging markets universe. How are other countries doing in comparison?
Outside of China, the emerging market countries have been doing quite well. For example, India was up 18.7 per cent in 2023. Eastern Europe and the Czech Republic were up 48.7 and 36 per cent, respectively. And then you also have Mexico, which was up 38.5 per cent, helped by nearshoring trends, and Brazil up 30.5 per cent due to its improving economy and fiscal discipline with some recent tax reforms.
With developed countries trying to be much less dependent on China, multinationals are going to countries like Mexico and India to do more of their manufacturing. This decoupling contributed to China’s relative underperformance.
What are some risks to watch for in 2024?
The Federal Reserve Board anticipates at least three interest rate cuts. Inflation has been coming down, but the caveat is if we have a spike in inflation, it could derail the rate-cutting scenario that is currently priced in. Even in this scenario, our disciplined process and stock selection wouldn’t change because we’re very focused on quality – for example, companies that earn a rate of return above their cost of capital – and quality stocks may do well despite higher-for-longer rates.
– Deanne Gage, Globe Advisor reporter
This interview has been edited and condensed.
Must-reads from Globe Advisor this week
How do the new advanced life deferred annuities fit into retirement income planning?
Advanced life deferred annuities (ALDAs), which were recently introduced in Canada, fill a need for Canadians in specific situations, but some advisors aren’t convinced these new products will meet the needs of most in retirement. Currently offered only through Desjardins Insurance, ALDAs enable clients to buy an annuity that starts payments as late as the end of the year they turn 85, providing protection against longevity risk and a tax-deferral opportunity. The premium must be paid from qualifying registered plans – including registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs) and deferred profit sharing plans – and is limited to 25 per cent of the plan’s value with a lifetime dollar limit of $170,000 in 2024 (indexed to inflation). Alison MacAlpine reports.
Why this bargain-hunting money manager is buying Fairfax India and Tim Hortons in China
Tim McElvaine believes the next few years will be kind to “deep value” investors like him. “The passive investing trend means investors are concerned with popularity and market cap rather than price, which I think creates a huge advantage for patient investors willing to look beyond the indexes,” says the founder, president and portfolio manager at McElvaine Investment Management Ltd. in Victoria. His $35-million McElvaine Value Fund currently has 16 holdings, including a mix of small and large-cap stocks. The fund’s top five holdings as of Dec. 31, 2023, include Maxim Power Corp. (at 18.2 per cent), privately held Wintaai Holdings Ltd. (14 per cent), PrairieSky Royalty Ltd. (9.4 per cent), Onex Corp. (6.6 per cent) and Bausch + Lomb Corp. (6 per cent). Brenda Bouw asks him what he’s been buying and selling.
Why some young people are ‘soft saving’ – and what that means for their future
Younger Canadians may be embracing a softer approach to personal finance that prioritizes a comfortable lifestyle today over socking away savings for the long term. It’s a mindset that some advisors say is rooted in a worsening affordability crisis that has hit young people particularly hard. But they’re telling young clients there’s still value in saving, even if the amount is small. A majority of Generation Z investors said they’re focusing on living a life of fulfilment now because the future feels too uncertain to plan for far-away goals, according to an Intuit Inc. study from 2023 that dubbed the approach a “soft saving” movement. Kelsey Rolfe explains.
How four advisors are positioning portfolios for the year ahead
Investor optimism is riding high heading into 2024. After a largely disappointing run for investors in 2023, the last few weeks of the year were marked by enthusiasm as markets anticipated that interest rate hikes were finally over and a mild recession or soft landing was likely in the first half of 2024. Will this prediction come true, prompting central banks to cut interest rates in the second half of the year – serving as a tailwind for bond and equity markets? Joel Schlesinger speaks with four advisors about their plans.
Also see:
Funeral planning and costs are often overlooked – here’s why they need more consideration
‘Don’t wait until tomorrow’: A globe-trotting, bowling-playing 91-year-old on retirement
How independent advisory firms are helping younger people get into the industry
Investing strategies for FHSAs depend on the time horizon for buying a first home
Millennials and Gen Z – retirement is possible, just start small
What you and your clients need to know
People keep making this costly TFSA mistake – and paying penalties averaging almost $1,500
We have a surprising problem with tax-free savings accounts (TFSAs). Call it over-enthusiasm on the part of contributors. Canadians are adding too much to their TFSAs and paying big penalties. The system for keeping people updated on their TFSA contribution room could certainly be better, but TFSA holders themselves need to pay more attention to what they’re doing. A good start for many would be to ask themselves if they’re juggling too many separate TFSA accounts. A penalty of 1 per cent a month applies to excess money added to a TFSA. Rob Carrick explains.
Emerge manager fails to repay money borrowed from ETFs, leaving fund investors as unsecured creditors in wind-up
Emerge Canada Inc. has missed a deadline to pay back the $4.7-million it owes to several exchange-traded funds (ETFs) it manages, leaving investors as unsecured creditors without their money. In a recent client memo, the asset manager confirmed that all of the company’s ETFs had been closed as of Dec. 29. However, it was unable to pay fundholders the money it owed – including accrued interest – prior the termination of the funds. Clare O’Hara and David Milstead report.
Considering annuities for retirement income? Here’s where to get quotes
Barring a resurgence of inflation, we’re now on the downslope for both interest rates and the payouts available from annuities. The good news here is that annuity payouts are still robust by the standards of the past decade. If you like the idea of exchanging a slice of your retirement savings in exchange for a lifelong monthly payout, give annuities some thought. Rob Carrick has more.
– Globe Advisor Staff