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Market Outlook

Emerging Markets (Core) Outlook

Outlook
12 July 2024

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Latest Emerging Markets (Core) economic and market outlook. 

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We have written at length about our positivity on Argentina, but of course recognise that the market will be volatile, given the rapid adjustment taking place in the economy. The progress made under Milei’s administration has been extremely encouraging, but there are still capital controls in place as the central bank reserves are still running at a low level. This is making investors nervous because previous efforts to control the currency have not been successful. The main difference this time is that previous imbalances are not present because Argentina is running fiscal and external surpluses. Nevertheless, there is still pressure on the currency and this is creating volatility in the equity market. Crucially, we believe the government is doing the right thing, and that volatility will begin to subside over the coming months as the economic adjustment continues to bear fruit. There is also speculation that the government is working on a new IMF programme that would provide funds which could be used to build reserves, allowing the currency to trade freely. If this came to pass it would likely be a major positive catalyst.

Turkey is among the cheapest equity markets in the world, partly due to many years of erratic monetary policy. However, the central bank has now been granted more autonomy to pursue economic orthodoxy, raising rates significantly to tackle inflation. Higher rates are likely to be a near-term headwind for the Turkish consumer, and we therefore own hard discount retailer BIM, which should perform well in this environment. With signs that inflation is beginning to fall rapidly, this may provide scope for some monetary easing towards the end of the year. We therefore also own selected Turkish banks as they are extremely sensitive to rate cuts.

In Brazil the political environment continues to deteriorate. Investors are concerned that Lula may look to regain some popularity by appointing a less orthodox central bank governor and loosening fiscal policy, despite not being on track to hit fiscal targets. This has led to outflows from the market, which we believe are likely to sustain in the near term, and we have therefore been reducing exposure. However, we will continue to monitor the situation as the market could perform well into the next election cycle if investors begin to price in regime change.

We continue to be constructive on India, focusing our exposure on areas where we believe we can access strong growth at reasonable valuations. One example is our overweight in Financials, where we recently bought Kotak Mahindra Bank. It used to be among the most expensive banks in India, trading at 3.5-4x book value. However, the stock price has treaded water in recent years while the bank has continued to grow, meaning that today it trades on less than 2x book value. This appears very attractive for a bank that we believe can grow at around 20% per year.

Our view on China is that the much-needed rebalancing from investment to consumption has stalled. It appears that the country is still relying on the investment-led growth model, but that the engine has shifted from real estate to advanced manufacturing. Here China is looking to add significant capacity in areas such as EVs to deflate costs and export these goods. However, this model is not only bad for domestic consumption, but it also faces risks in the form of more hawkish governments in Europe and the US, particularly if Trump is re-elected.

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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