Outside the markets of the most developed economies there are also attractive investment possibilities.
In these emerging markets, the variables that are handled differ almost nothing from the concerns that plague Wall Street, European markets or Japan: evolution of interest rates, economic growth, public deficits, geopolitical risks or business profits.
Of course, for a European or American, the final result of investing in these markets, which concentrate 82% of the world's population, although they only represent 26% of the stock market value, will also depend on the currency exchange rate.
And the fact is that, if you bet on a market whose currency depreciates, the currency effect can wipe out possible capital gains.
Within this large group of countries, China is a point and apart.
In 2023, the MSCI Emerging Markets world index rose 9.83%, but if the Chinese stock markets are excluded, the gain was 20%, in line with that obtained in the markets of the most developed economies.
The Asian giant is currently the great burden of emerging markets, which has led it to give up its fourth largest share of global capitalization to the thriving India.
Ignacio Dolz de Espejo, director of investment solutions at Mutuáculos, highlights that the main reason for the poor performance of the Chinese stock market has been the slowdown in its growth, “motivated by a slower rate of population increase and by a crisis in the real estate".
For this 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 stimulus measures planned by the Government.
Brad Freer, manager of Capital Group, believes that it is not advisable to ignore what is happening in this country.
“The massive sell orders [of shares] 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 the evolution of emerging markets in 2024. Vladimir Oleinikov, an analyst at Generali AM, points out that these markets are trading at a historical discount of 7%, while The US and the EU have a premium of 36% and 3%, respectively.
“They look even more attractive by the Shiller measure [a long-term valuation based on cyclically adjusted 10-year earnings], at a discount of around 49% to Western indices,” he says.
These discounts also occur in countries that, in recent years, have experienced notable economic and financial improvements.
The foreign exchange market has reflected this increased confidence.
The Colombian peso rose 26% against the dollar and the Mexican peso rose 15% last year.
The Brazilian real appreciated almost 9% and the Moroccan dirham 5.72%, while the currencies of Hungary and Poland also gained positions against the dollar of 11% and 7%, respectively.
The Indian rupee only fell 0.57% against the greenback, the Chinese renminbi fell 2.84%, while the Argentine peso (-78%) and the Turkish lira (-36.6%) took the first put into depreciation.
Strengths
Without a doubt, emerging markets generally offer greater risks, often linked to the evolution of raw materials, the evolution of interest rates in the United States or Europe with which they compete, and the growth of both surrounding countries and of the most developed.
But today, infrastructure growth is accelerating, public balance sheets are stronger, and changes in supply chains are boosting regional economies.
Brad Freer gives some examples: “In India, the construction of new roads, real estate developments and industrial parks has made some areas of the country almost unrecognizable from a few years ago.
“Indonesia is attracting foreign investment aimed at creating the electric vehicle supply chain, and Mexico is becoming a global manufacturing relocation center,” he explains.
Alejandro Arévalo and Reza Karim, managers at Jupiter AM, summarize the factors in favor of these economies: “We would highlight the greater growth differential with developed markets, the fall in inflation, the independence of central banks and the strong growth in consumption internal".
For her part, Gillian Edgeworth, strategist at Wellington Management, emphasizes the greater strength of these economies.
“The Covid-19 crisis generated the largest drop 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 to be resilient in the face of these adversities,” she highlights.
And this resistance is due to a monetary policy linked to inflation and greater flexibility of their currencies.
They have also developed their own markets to finance themselves with less dependence on foreign capital.
These countries will begin to lower interest rates before the Fed or the ECB.
Brazil has already started this expansionary policy, while Mexico has not yet begun to reduce them.
“Fears of recession in the United States could help these reductions in the price of money even at a greater pace,” explains Michael Bourke, director of emerging equities at M&G.
For Xavier Hovasse, head of emerging equities at Carmignac, the good evolution of Latin American markets will continue this year.
He highlights Brazil and Mexico in his preferences.
He considers that Mexico has emerged as the great winner of the geopolitical tensions between the United States and China.
“In the next five years, Mexico could register an increase of 155 billion dollars in its exports to the United States, that is, more than 10% of the country's GDP,” he appreciates.
As for Brazil, it expects the record trade surplus of $90 billion from 2023 to be maintained this year. “These economic tailwinds in the agricultural and oil sectors are likely to drive strong trade expansion in Brazil and infect income.” Brazilian variable, which is currently trading at a large discount,” he concludes.
Take advantage of high rates
The interest rates on 10-year bonds in emerging countries generally cause envy compared to the 3.2% that the Spanish offer for that term.
In Colombia they are 9.5%, in Mexico 9.6%, in Brazil 10.7%, in Indonesia 6.7% and in Turkey 29.4%.
Without a doubt, having bought these bonds in Brazil, Mexico or Colombia was a great deal last year.
To its high profitability we must add 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 favorable for this year if, finally, rate cuts begin in the United States and Europe.
BlackRock recommends “emerging market hard currency debt for its relative attractiveness and quality.”
Álvaro Antón, head of abrdn, indicates that “many emerging countries will be among the first to lower interest rates, after having been among the first to raise them.
This should support local currency debt.”
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