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Analysts at investment bank UBS have predicted that emerging market (EM) assets are likely to have a difficult start to 2024 before picking up and finishing the year with better gains than the major developed economies of the world.

The Swiss-based bank’s outlook published on Tuesday forecast that EM fixed income would return 8-10% next year, EM equities 6-8% and currencies 1-3%, although most of the gains would be “backloaded”.

“With risk premia now highly compressed, we think even a mild U.S. recession can first see EM assets pull back,” the bank’s report said, even if that then prompts the U.S. Federal Reserve to cut its interest rates, which in turn is likely to drive down global borrowing costs.

UBS sees “meaningful reductions” in U.S. rates next year and end the year at between 2.50% and 2.75%, which is substantially lower than many major investment banks have predicted.

Weaker global growth was “certainly not being priced” by markets, while the bank’s in-house EM risk appetite index had risen towards levels that historically only tended to be surpassed when global Purchasing Manager Index scores were significantly higher.

“Most EM assets have been in a state of ‘zen’ this year despite continued pressure from U.S. yields and China housing,” UBS’ analysts said.

“We expect a better year for EM in ‘24 as Fed headwinds dissipate and growth differentials cyclically improve, but we don’t expect this to be an easy ride.”

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