Why the Uneven Global Pandemic Recovery Will Lead More Institutions Into Global Markets Than Ever

While the COVID-19 pandemic has long faded into the rearview mirror, its lasting impact is still being felt on a widespread scale. For institutional investors, the global market volatility thrown up by an uneven post-pandemic recovery has thrown up fresh opportunities and risks throughout global markets.

Although global growth has shown relative resilience in the wake of the pandemic, an uneven recovery has been intensified by varying international responses to the health crisis, macroeconomic factors like historically high inflation, and the flare-up of geopolitical conflict in Europe and the Middle East.

In recent months, buoyed by exponential growth in the field of generative AI, the United States has been seen to outpace the likes of Europe and China. However, hopes of early Fed interest rate cuts in the US have been dashed due to lingering high inflation, and the prospect of a tumultuous and close-run presidential election in November may mean that no bloc is fully safe from uncertainty.

What does this mean for institutional investors and discovering new opportunities in 2024? The answer may hinge on abandoning old reliances and building a more global outlook.

Finding Value in Emerging Markets

The impressive form of Sandglass Capital Management’s $262 million flagship fund last year underlined the quality of opportunities to be found in emerging markets (EMs).

Returning a resounding 23% in 2023 through the purchase of high-risk government bonds in struggling nations like Sri Lanka, Ghana, Ukraine, and Greece, Sandglass’ returns through November were five times higher than the average in an index maintained by Hedge Fund Research.

However, the performance of EMs is becoming increasingly convoluted, and hedge funds may be wise to look to the difficulties experienced throughout the Chinese economy as it struggles to keep up with market expectations.

This has invariably pushed more institutions to look on a more widespread scale for opportunities within the world of investment opportunities throughout emerging markets.

The view that emerging markets operate as a singular bloc like the European Union risks undermining the many key characteristics that differentiate across the landscape. While many share geopolitical risks and complex international relationships, they can be wildly different in their nature, and require plenty of exploration before institutions can act.

Some of the many differences within emerging markets can include their respective roles as energy exporters or importers, and whether an economy is built on manufacturing or services. These can help to develop a more comprehensive understanding of markets and how they operate.

For institutions with a more holistic overview of EM opportunities and risks, accessing a full suite of global markets through real-time data centers can pave the way for stronger growth prospects as unpredictability continues to dampen the outlook across more traditional economies.

The Return of Risk

2024 is so far shaping up to become the year that risk appetite is returning to institutional investors. Much of this risk appears to revolve around exposure to global emerging markets, with March seeing the biggest rotation into EMs since April 2017.

According to Bank of America polling, just under one-fifth of fund managers suggested that emerging market equities were set to become the biggest beneficiaries of US Federal Reserve rate cuts, ranking them behind only long-term growth prospects and value stocks in the survey.

The return of risk appetite throughout institutions is being driven by the expectation of a US economic recovery in 2024, but the uneven post-pandemic recovery still presents risks in the United States and beyond.

In a recent survey charting the top global risks posed to economies in 2024, 66% of the 1,490 respondents believed that extreme weather was the most likely to pose a material threat on a global scale during the year. However, pandemic recovery-related factors like a cost-of-living crisis and economic downturn accounted for a 75% combined share among respondents.

Other major concerns like an escalation of geopolitical conflict and generative AI misinformation or disinformation in an election year for many major economies also ranked high.

For institutions seeking to level up their risk in emerging markets, sufficient due diligence must be conducted before building exposure. With headwinds continuing to loom, EMs carry a significant level of opportunity and danger for funds.

Flocking to the Tropics

One of the key areas in which hedge funds are looking for value appears to be within the tropics, as appetite for forex carry trades has seen masses of market participants turn their attention to the Brazilian real, Colombian peso, Mexican peso, and Indonesian rupiah with strong levels of upside.

In cooler climates, a globalized FX drive can be found in the Hungarian florins’ newfound carry trade popularity, according to Bloomberg’s FX carry trade index, which measures the carry trade returns across various emerging markets.

In Asia, global hedge funds have been seeking solace in India, with institutions becoming infatuated with the nation’s growing depth and liquidity as a functional alternative to China’s ailing economy.

Recent players entering India’s markets include the Singapore-based hedge fund Dymon Asia Capital and Citadel Securities among various funds and brokers entering a frontier that had long been shunned by institutions due to taxation issues and the inability to hedge investments through short selling.

Geopolitical Fragmentation Remains a Threat

Although going global appears to be benefitting many risk-taking institutions already in 2024, leading asset manager BlackRock warned in its outlook for the year that globalization is undergoing a ‘meaningful shift’ caused by geopolitical fragmentation and economic competition.

According to Trade Openness Index figures published by the BlackRock Investment Institute, trade integration since 2015 has begun falling at a rate that hasn’t been seen since the interwar period in the early 20th Century.

This factor only adds to the level of complexity institutions are tasked with overcoming to flourish in the post-pandemic landscape.

In a world that’s become increasingly unpredictable since the health crisis in 2020, market volatility is to be expected. For resourceful and risk-taking institutions backed by sufficient research, this presents a series of new opportunities throughout global markets. However, identifying and taking them will be a significant challenge in itself.