Last year was a historic period for emerging-market fixed income: interest rates set by central banks were for the first time on a par with those in developed markets. The convergence resulted largely from decisions by emerging market central bankers to eschew less aggressive fiscal and monetary expansion during the pandemic, which held inflation low relative to developed markets.
This convergence in interest rates – which meant that emerging-market rates were falling – might suggest that emerging-market equities would have outperformed given an improving economic-growth outlook. That was not the case, as emerging-market stocks at the benchmark level were held back in 2023 by the disproportionately large impact of China. Outside China, emerging-market equities performed well, with Brazil, Taiwan, South Korea, Mexico and India all returning more than 20%. For the first time in two decades, emerging market benchmark stock and bond indexes did not move in lockstep.
The question is whether equities in emerging markets will catch up to bonds this year.