There are also attractive investment opportunities outside the markets of the most developed economies. In these emerging markets, the variables covered are little different from the concerns plaguing Wall Street, European markets or Japan: interest rate trends, economic growth, public deficits, geopolitical risks or business benefits. Of course, for a European or American, the end result of investing in these markets, where 82% of the world's population lives, although they represent only 26% of the stock market value, also depends on the exchange rate of the currency. And the fact is, if you bet on a market whose currency is depreciating, the currency effect can wipe out any potential capital gains.
Within this large group of countries, China stands out. In 2023, the MSCI Emerging Markets global index rose by 9.83%, but excluding Chinese stock markets, the increase was 20%, equivalent to that achieved in the markets of the most developed economies. The Asian giant is currently the major burden of emerging markets, which has seen it cede its fourth-largest share of global capitalization to prosperous India.
Ignacio Dolz de Espejo, director of investment solutions at Mutuáculos, emphasizes that the main reason for the poor performance of the Chinese stock market is the slowdown in its growth, “motivated by slower population growth and a crisis in the real.” Real estate sector.” For the expert, China’s long-term growth expectations are convincing; Their stock market valuations are very low, which increases their attractiveness, and everything will depend on the success of the government's planned stimulus measures. Brad Freer, manager of Capital Group, believes that it is unwise to ignore what is happening in this country. “The huge sales orders [de acciones] “They have created investment opportunities in innovative companies that have a dominant market share in their home country, generate strong cash flows and trade at attractive valuations,” he explains.
While China has yet to regain investor confidence, analysts are optimistic about emerging markets' performance in 2024. Vladimir Oleinikov, analyst at Generali AM, points out that these markets are trading at a historic discount of 7%, while the US and the EU have not yet regained investor confidence at a premium of 36% and 3%, respectively . “By Shiller standards, they seem even more attractive.” [una valoración a largo plazo basada en los beneficios a 10 años ajustados al ciclo]“, at a discount of around 49% compared to Western indices,” he states. In addition, these discounts are available in countries that have experienced notable economic and financial improvements in recent years.
The foreign exchange market reflects this increased confidence. The Colombian peso rose 26% against the dollar last year and the Mexican peso rose 15%. The Brazilian real gained almost 9%, the Moroccan dirham gained 5.72%, while the currencies of Hungary and Poland also gained 11% and 7% against the dollar, respectively. The Indian rupee fell just 0.57% against the greenback, the Chinese renminbi fell 2.84%, while the Argentine peso (-78%) and the Turkish lira (-36.6%) were the first to depreciate.
Strengthen
Without a doubt, emerging markets in general pose greater risks, often linked to the development of raw materials, the development of interest rates in the United States or Europe with which they compete and the growth of both countries in their environment as one of the greatest risks developed. But today, infrastructure growth is accelerating, public budget balances are stronger and changes in supply chains are boosting the regional economy. Brad Freer gives some examples: “In India, the construction of new roads, real estate developments and industrial parks has left some areas of the country almost unrecognizable for several years.” “Indonesia is attracting foreign investment aimed at strengthening the supply chain for to build electric vehicles, and Mexico is becoming a global hub for manufacturing relocation,” he explains.
Alejandro Arévalo and Reza Karim, managers at Jupiter AM, summarize the factors in favor of these economies: “We would like to highlight the greater growth gap with developed markets, the decline in inflation, the independence of central banks and the strong growth in domestic consumption. “”
For her part, Gillian Edgeworth, strategist at Wellington Management, emphasizes the greater strength of these economies. “The Covid-19 crisis led to the largest decline in global GDP in decades, which was followed by the fastest cycle of increases in years by the US Federal Reserve and the ECB. “Emerging markets have proven resilient in the face of these adversities,” he points out. And this resistance is due to inflation-linked monetary policies and greater flexibility in their currencies. They have also developed their own markets to finance themselves more independently of foreign capital. These countries will start cutting interest rates before the Fed or ECB. Brazil has already started this expansionary policy, while Mexico has not yet started to reduce it. “Fears of a recession in the United States could cause money prices to fall even faster,” said Michael Bourke, director of emerging markets equities at M&G.
For Xavier Hovasse, Head of Emerging Markets Equities at Carmignac, the good development of the Latin American markets will continue this year. In his preferences he highlights Brazil and Mexico. Consider that Mexico emerged as a big winner from the geopolitical tensions between the United States and China. “In the next five years, Mexico could see an increase in its exports to the United States by $155,000 million, more than 10% of the country's GDP,” he notes. Brazil is expected to maintain its record trade surplus of $90 billion in 2023 this year. “These economic tailwinds in the agricultural and oil sectors will likely lead to a large expansion of trade in Brazil and infect Brazilian stocks, which will lead to a large expansion of trade in Brazil, which are currently trading at a large discount,” he concludes.
Benefit from high tariffs
Interest rates on 10-year bonds in emerging markets generally arouse envy, given the 3.2% that the Spanish are offering for this term. In Colombia they are 9.5%, in Mexico 9.6%, in Brazil 10.7%, in Indonesia 6.7% and in Turkey 29.4%. Buying these bonds in Brazil, Mexico or Colombia was undoubtedly a great deal last year. Adding to its high profitability is the strength of its currency against the dollar and also the revaluation of the bond itself, whose price rose as interest rates fell. Analysts are also positive for this year if interest rate cuts finally occur in the USA and Europe. BlackRock recommends “emerging market hard currency bonds due to their relative attractiveness and quality.” Álvaro Antón, head of abrdn, points out that “many emerging markets will be among the first to cut interest rates after being among the first to raise them. This should support local currency debt.”
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