Riding the Emerging Markets Wave

Investing in emerging market (EM) assets is a topic that is recently gaining traction amongst investors. We believe that EM assets stand to benefit from particularly interesting tailwinds in the short term and could outperform those in the US. Similarly, given the increasing likelihood of a Fed pause, we believe, EM currencies have also the potential to outperform the US dollar, provided we avoid a deep recession.

Several factors underlie this positive view. A number of key themes for 2023 look like the mirror image of 2022. Last year saw US growth outperform China, inflation rise sharply, and central banks hike aggressively, a combination that was tough on emerging market assets. However, this year, growth in China is accelerating while the US slows, inflation is falling, and central banks are pausing, a reversal that would seem much better for EM.

In addition, EM assets are considerably cheap and offer a greater margin of safety. Emerging market equities, currencies, and sovereign bonds all still trade at larger-than-average discounts to their US peers. This presents an opportunity for investors to purchase assets at a lower valuation, which could result in a higher return on investment.

EM Powerhouse: The Case for Investing in India

India is a market that is entering a new era of growth, creating a once-in-a-generation shift in opportunities for investors. Estimates show that India's GDP is poised to double by 2030, and its market capitalization could reach $10 trillion, representing a growth rate of 10%. Annually.

The main drivers behind India's growth story are demographics, digitalization, and deglobalization. These global trends are favoring the new India, which is benefiting from three idiosyncratic factors. The first is India's demographic landscape, which is shifting with a rapidly increasing youth population, driving the country's growth and technological advancements. Roughly 50% of the population is under 24 years old, and they are digitally savvy, socially aware, politically engaged, and economically ambitious. This youthful population is driving the trend of digital pervasiveness and rapid urbanization, leading to a surge in startups and entrepreneurship. With such a large youth population, India's growth potential is undeniable.

Second, India’s share of global exports is set to increase meaningfully thanks to a surge in offshoring. Given the big surge in global spending on outsourcing, the number of people employed in India for jobs outside the country is likely to at least double. Multinationals are more optimistic about investing in India, and the government is encouraging investments by building infrastructure and policies aimed at lifting corporate profits share and GDP via tax cuts. The latest big name is Apple, which announced it would move more iPhone manufacturing from China to India over the next few years.

Third, India is pursuing a distinct model for the digitalization of its economy, supported by a public utility called India Stack. India Stack is a set of APIs (Application Programming Interfaces) that allows the Indian government and private companies to provide digital services to citizens. It includes several layers such as e-KYC (electronic Know Your Customer), digital signature, and a unique identification number (Aadhaar) which serves as a digital identity for citizens. This allows forthe secure and efficient delivery of services such as financial transactions, digital signatures , and e-governance services. This could allow India to continue outperforming the world in GDP growth in the coming decade.

Beyond the US: Why Mexico Should be on Your Investment Radar

The North American Leaders Summit in early January saw the commitment by the United States, Canada, and Mexico to work together to create stronger regional supply chains and promote targeted investment in key industries of the future, such as semiconductors and electric vehicle batteries. This agreement in principle underscores the opportunity for Mexico to benefit from US-led nearshoring. Mexico has a sizable manufacturing labour force and proximity to the US.

Mexico presents an opportunity for investors to benefit from US companies looking to shorten supply chains and bring more production back from Asia. The country has a strong manufacturing base and a skilled workforce which can support the growth of manufacturing in the country. For semiconductors, that means Mexico could potentially be a supplier or at least a supplier of the goods and materials that go into fabrication. This is one of the key reasons why Mexico’s assets have been outperforming recently. The iShares MSCI Mexico ETF made a new 52-week high last week.

The Rise of India and Mexico

In conclusion, our analysis suggests that investing in EM assets, particularly in India and Mexico, presents a compelling opportunity for investors in the short term. The growth drivers for both countries are favourable , and the valuation advantage of EM assets makes them particularly attractive.