Emerging markets in general have proved a disappointment for many investors this year – and indeed over the longer term. However, we believe there are opportunities to be found in economies such as Brazil, Indonesia and Mexico. All three benefit from a strong economic backdrop and are home to well-managed companies with good growth prospects.
Emerging markets (EM) have long been touted as offering significant growth opportunities for investors. Yet, as a whole, EM equities have disappointed. The MSCI EM index, for example, is up by just 0.7% in local terms over the year to date, compared with a 9.6% rise in the MSCI World Index. The strong dollar and weakness in China’s economy are among the factors weighing on EM stocks this year.
That’s why we believe investors should take a highly targeted approach to the region. We are building confidence in economies like Indonesia, Brazil and Mexico where valuations are attractive and economic fundamentals are improving. Central banks have controlled inflation and now have scope to cut rates. Take the example of Brazil, where the annual pace of inflation fell more than expected in October. The central bank cut interest rates in August – having hiked them to a six-year high – and has pledged to implement further cuts in the months ahead.
Brazil’s sensible approach to fiscal spending (targeting a primary surplus in 2025 – the first since 2013) and tax reform provide further encouragement. Economic growth is also picking up, assisted by high commodity prices such as iron ore and soybeans.
Indonesia, meanwhile, posted solid growth of 4.9% in the third quarter, with robust private consumption (which accounts for more than half of Indonesia’s GDP) helping to offset falling exports as global growth slows. Indonesia is much less dependent on global growth than its regional counterparts: exports account for 20% of GDP, compared with 60% for Thailand. Higher government spending in the run-up to the 2024 general election should support economic activity during the fourth quarter. In the long term, the country will benefit from plentiful natural resources, a large and youthful working population, and a growing middle class. A robust banking system and strong public finances are other positives.
The Mexican economy is another bright spot globally. The International Monetary Fund, ratings agencies and investment banks have all upgraded their growth forecasts. Robust investment, the completion of unfinished projects and “friend-shoring” are among the key drivers supporting economic activity.
Investment opportunities in these markets include Fomento Económico Mexicano (FEMSA), the dominant convenience store chain in Mexico. The company is attractively priced, has excellent growth prospects – it reported consensus-beating third-quarter earnings at the end of October – with an opportunity to take market share from mom and pop operators.
Read our Q3 Market Update to learn more about the opportunities we see in emerging markets. You can also learn more about investing in emerging markets in this episode of the Good Value podcast.
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