Artisan Canvas

2024 is expected to be one of the biggest election years on record with more than half of the world’s population planning to go to the polls. This busy election calendar comes at a particularly opportune time as geo-political tensions are running high across the globe.

The EMsights Capital Group held their annual research retreat in December. For two days the investment team gathered off-site to recap the events of 2023 and look forward to 2024. This year’s agenda also featured several outside speakers ranging in expertise from the Russia/Ukraine war to the current health of the US economy.

Over the course of the two days, the team identified several cross-regional trends they expect to remain prominent in 2024:

In our previous blog post “Narrow Leadership Creates Opportunity”, we highlighted the attractive valuations of US mid-cap stocks, which are at their cheapest levels relative to large caps in over 20 years. As value investors, we distinctly understand the importance of starting-point valuations for forward returns, however you don’t have to be a value investor to appreciate the asset class’s appeal.

Since 1979, the Russell Midcap® Index has outperformed both the Russell 1000® and 2000® indices (Exhibit 1) on an annualized basis by 0.8 percentage points and 1.9 percentage points, respectively. While that may seem small, the power of compounding can result in large differences as one’s time horizon expands.

Zambia defaulted in 2020 on its sovereign bonds and has been on an unrelenting quest to restructure its debt since. While finding itself in distress is not notable, the country’s plan to find its way out may be. Zambia serves as the first meaningful test of the Common Framework—a Group of 20 (G20) initiative to simplify and accelerate the sovereign debt restructuring process. In a perfect world, this initiative should create a quick and successful resolution for Zambia and pave the way for other emerging economies seeking debt-relief. Unfortunately, as we know all too well, the world is far from perfect.

On Sunday, November 19, Argentina elected Javier Milei to be its next president in a decisive run-off election. Radical libertarian outsider, Milei, defeated Sergio Massa, the country’s Minister of Economy since August 2022. Voters, investors, and business owners are hopeful Milei’s libertarian policies, which are a drastic divergence from the current policies, will aid Argentina’s recession-prone economy. The country is currently facing inflation topping 140%, interest rates at 130%, dwindling central bank reserves, and a weakening currency regime. However, the grass may not be greener on the other side. Implementing Milei’s policies will be a challenge without a congressional majority, and his abrupt, “chainsaw” approach may backfire. Even Taylor Swift's Eras Tour, which visited Buenos Aires last week, could not boost this economy—is there anything that can?!

The US equity market’s narrow leadership in 2023 is well chronicled, but it’s nearly impossible to overstate.  The “Magnificent Seven”, as the largest seven US stocks have been dubbed, have dominated YTD equity returns—contributing, in effect, 100% of the S&P 500 Index’s total return (through October).

These seven stocks have returned on average 84%, compared to -3% for the “S&P 493”, and more than half of S&P 500 stocks have generated negative returns. In fact, the equal-weight S&P 500® Index is lagging the market-cap weighted S&P 500 by the most since 1998 as the S&P 500 Index is up over 10%, while the equal-weighted S&P 500 was down ~2% through October.

President Bola Tinubu won Nigeria’s presidential election in February 2023 and was faced with the seemingly impossible task of improving the battered economy he inherited. While the legitimacy of Tinubu’s win was contested by many voters, investors welcomed the new administration with open arms as key tenants of Tinubu’s campaign rested on making Nigeria a friendlier investment destination. Tinubu wasted no time getting to work, but a few months into his term, he was falling flat on his promises… or at least that is what it seemed. So, the EMsights team traveled to Nigeria twice in the past few months to learn more!

Kenya’s fundamentals today may be the most exciting they’ve been in decades. Following a peaceful election last August, President Ruto’s new administration has continuously expressed commitment to fiscal consolidation and structural reform that will improve the sovereign’s credit quality. Kenya is supported by the international community, which wants to help fund its success—as most recently evidenced by the IMF’s announcement it will extend further aid to the country (more on which shortly).  So what gives—why do Kenyan asset prices tell such a different story?

The macroeconomic backdrop in emerging markets has been uncertain for some time now—indeed, if anything, uncertainty seems to be increasing. War continues in Ukraine, inflation globally remains sticky (particularly core inflation) and, consequently, global monetary policy is, overall tilted toward tightening (relatedly, the Reserve Bank of Australia announced a surprise hike in early May). And at least partially thanks to tighter monetary policy (which is ongoing, with both the Fed and ECB raising rates again at their recent May meetings), some things have broken—e.g., we’ve seen a cryptocurrency winter, trouble with UK pension funds, concern about global real estate and, most recently, bank failures in the US and Europe.

EMsights team members returned to Washington, D.C., in April for the IMF and World Bank Spring Meetings, conducting some 200 interactions with a swath of government officials and representatives. Frequent readers will recall we similarly attended the IMF and World Bank Annual Meetings last fall—and were unsurprised by the somber mood, given ongoing macro and geopolitical uncertainty.