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Market Outlook

Emerging Markets (Core) Outlook

Outlook
14 January 2025

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Latest Emerging Markets (Core) economic and market outlook. 

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We appear to be entering a more volatile, polarised world, characterised by an increasing divergence in performance across the EM universe. We believe our agile approach that combines top-down and bottom-up analysis is perfectly positioned to dynamically capitalise on these opportunities. So where do we see the key opportunities and risks at present?

We continue to be very constructive on Argentina. President Milei has made sweeping changes to the bureaucracy and red tape that has held the country back and, in less than a year, has converted a 3% primary fiscal deficit into a 2% surplus. With the trade deficit having also turned to a surplus, Argentina would appear to be relatively well insulated from an external shock. The manifest reform progress and a close relationship between Trump and Milei increase the likelihood of a renewed IMF deal, which would serve as another positive catalyst. Many areas appear to be moving towards the bull case, with economic activity levels, inflation and Milei’s popularity all tracking well. The parallel and controlled exchange rates continue to converge, suggesting that the latter is not overvaluing the Peso. Such convergence will theoretically make it easier to remove currency controls, a major outstanding economic reform. It is also encouraging to detect a change in tone from the mainstream media regarding Argentina’s reform programme, which should help equity risk premia. We recently shifted much of our Argentinian exposure into Financials, which we believe still trade at reasonable valuations and have a very strong credit growth cycle ahead of them, with credit penetration-to-GDP still in the single digits in Argentina. These positions subsequently rallied sharply, both in absolute terms and relative to other sectors, particularly after several broker upgrades.

We are also positive on Turkey, which in some ways resembles Argentina in the sense that inflation spiked due to gross mismanagement, but is now being reined in by a return to economic orthodoxy. With monetary policy in extremely restrictive territory, and fiscal policy likely to become slightly contractionary this year, inflation should continue on its downward trajectory. This should enable monetary loosening, and indeed the central bank recently cut rates by 250bps. We believe this provides an exciting opportunity for a depressed market to re-rate, particularly the banks that are very sensitive to rate cuts.

India also looks well positioned in the current environment as it is geopolitically ‘neutral’, with a vast domestic economy that is relatively isolated from tariff rhetoric. It should also benefit from lower oil prices in a scenario where an increasing supply of hydrocarbons, principally from the US, meets weakening global demand. The market currently appears to be in a mid-cycle ‘air pocket’. We have been saying for some time that we would like to add to India if a pullback presented an opportunity to pick up stocks at more reasonable valuations. We have therefore arranged a research trip to identify potential ideas here.

From a sector perspective, we are particularly bullish on Technology, most notably AI. Hyperscalers such as Google and Microsoft are still increasing their investments in AI, and we are confident that this will continue for several reasons. Firstly, the models are still scaling, and are becoming increasingly useful in the real world as they do so. For example, improvements in models are now allowing companies to create agents to perform tasks that can replace humans – so-called agentic AI. This should drive productivity gains, increasing the value of the models and justifying the hyperscalers’ CapEx. Secondly, there is an element of game theory here. For each of these companies, if they do not invest in AI, their core business could be disrupted. For example, Google’s search business could be particularly vulnerable to AI disruption unless it continues to invest. Crucially, not only do the hyperscalers have the need to invest in AI, they also have the ability. Despite record investment, they remain free cash flow positive, with net cash balance sheets.

On the other side of the coin, twin deficit countries are likely to be particularly vulnerable to an external shock, be it from tariff rhetoric or spikes in risk premia amid heightened volatility. Southeast Asian economies such as Thailand and Indonesia would fall into this category.

But it is Mexico and China that look particularly vulnerable at present. Mexico’s socialist government was already implementing market-unfriendly reforms before Trump’s victory, and the country is now firmly in Trump’s tariff crosshairs due to its failure to control the flow of illegal drugs and immigrants across the border. For an economy that is heavily reliant on the US, this is a major risk.

China has been a key underweight for us, given the range of problems facing the economy as it struggles to transition from export- and investment-led growth towards domestic consumption. These problems are likely to be exacerbated by an adversarial US president. However, we believe that China is waiting to assess the measures that Trump implements once in power, and will likely use stimulus measures to mitigate the impact. This could result in sharp relief rallies, and we stand ready to rapidly adjust positioning should this be required.

Finally, we are underweight Brazil, where fiscal policy appears too loose against a backdrop where inflation has ratcheted up to a 14-month high. Investors have priced in significant rate increases to offset this, with SELIC predicted to rise to 14-16%. Given Brazil’s high debt levels, interest rates of this magnitude are leading the market to question debt sustainability.

Important Information:

Nothing in this document constitutes or should be treated as investment advice or an offer to buy or sell any security or other investment. TT is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA).

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