Emerging Markets Poised for Growth with Lower Interest Rates and AI Opportunities

Key Takeaway

• Christine Phillpotts of Ariel Investments projects a bullish outlook for emerging markets in 2024, driven by lower interest rates and valuation discounts.
• Emerging markets are seen as key players in the AI revolution, with significant investment opportunities at lower multiples than developed markets.
• Microsoft's $2.2 billion investment in Malaysia underscores the region's growing importance in global tech, particularly AI infrastructure.

Emerging Markets Outlook

Christine Phillpotts, a portfolio manager at Ariel Investments, shared insights with CNBC’s Mike Santoli at Berkshire Hathaway’s annual shareholder meeting, projecting a positive outlook for emerging markets in 2024 and beyond. Phillpotts, who oversees Ariel’s Emerging Markets Value and Emerging Markets Value ex-China strategies, attributes this optimism to a lower interest rate environment anticipated for the year, which she believes will redirect investment flows towards emerging markets. This perspective is supported by the April labor market report, indicating weaker-than-expected job growth and a potential for the Federal Reserve to initiate rate cuts. Phillpotts also highlighted the valuation discounts for emerging market equities, which are currently at all-time lows when compared to the S&P 500, alongside evidence of accelerated earnings growth in these markets.

For investors eyeing opportunities within the artificial intelligence (AI) sector, Phillpotts pointed out that emerging markets offer significant "picks-and-shovels" plays essential for powering the AI revolution. These companies, crucial for the deployment of today's infrastructure, are available at considerably lower multiples than their counterparts in developed markets. Year to date, Ariel’s Emerging Markets Value strategy has outperformed, posting an 8.74% net gain against the MSCI EM Net Index’s 2.37% increase, and the MSCI EM Value Net Index’s 1.31% rise. The ex-China strategy specifically has seen a 9.97% net increase, outpacing the MSCI EM ex-China Net Index’s 4.01% gain.

U.S. Labor Market and Interest Rate Speculation

The U.S. labor market report for April revealed job growth of 175,000, falling short of the expected 240,000, with the unemployment rate rising to 3.9%. This development has fueled speculation that the Federal Reserve might lower interest rates in the coming months, a move that could create a more favorable investment climate for emerging markets. Average hourly earnings and the labor force participation rate also reported figures below consensus estimates, suggesting a potential easing of inflationary pressures. Following the report, Treasury yields dropped, and stock market futures saw gains, indicating a shift in market sentiment towards the possibility of a "Goldilocks" economic scenario that could prevent further Fed tightening.

Microsoft’s Investment in Malaysia

Microsoft Corp. has announced a $2.2 billion investment in Malaysia’s digital infrastructure, a move that could significantly impact the KLCI Index and position Malaysia ahead of regional peers. This investment is part of a larger $3.9 billion commitment to Southeast Asia, aimed at enhancing cloud computing and AI services. Microsoft CEO Satya Nadella emphasized the investment’s role in supporting Malaysia’s AI transformation, with the southern Johor Bahru region poised to become a key AI data center hub. The investment is expected to contribute approximately $115 billion to Malaysia’s economy by 2030, highlighting the country’s emerging significance in the global tech landscape and its potential to attract further international investments.

Street Views

• Christine Phillpotts, Ariel Investments (Bullish on emerging markets):

  "A lower rate environment this year will boost the thesis for investing in emerging markets... there are several reasons why emerging markets should outperform in 2024 and beyond." "Valuation discounts for emerging market equities are at all-time lows, based on a comparison of the MSCI Emerging Markets Index versus the S&P 500." "Earnings growth has accelerated in the emerging markets space." "Key opportunities in emerging markets lay within the picks-and-shovels plays that will power the AI revolution."