Emerging markets mid-year review

Our global macro analyst examines the latest investment data in emerging markets, focusing on crucial economic indicators and market trends.

1. Given the fast growth and changing economic structures of emerging markets (EMs), offer a diverse range of investment opportunities.
   
2. We analyse the data and trends with a focus on energy sector dynamics, unemployment rate, M&A activity, equities and a spotlight on countries insights.
3. Using Datastream we examine the factors contributing to the EMs’ momentum, by recognising these markets’ nuances and leveraging financial and economic reasoning.

Emerging markets (EMs) offer a variety of opportunities for investors, as these markets are characterised by fast growth and changing economic structures, providing diverse investment avenues. This blog analyses the latest data to determine the investment prospects in EMs, focusing on crucial economic indicators and market trends.

This trend reflects broader economic changes, with the reaction to inflation from emerging markets’ central banks playing a crucial role. While global inflation has peaked, core inflation is generally decreasing, with a notable trend in India. However, numerous G20 Developed Markets (DMs) still face inflation rates above central bank targets.

Unemployment is below 2019 levels across many EMs and inflation appears to have turned the corner in both Latin America and Asia.

The M&A activity in emerging markets offers important insights into the state of the corporate sector and investment sentiment. Despite economic challenges like the global financial crisis and the pandemic, deal volume has remained steady, indicating a sustained interest in risk. However, the current economic climate, defined by investor uncertainty, limited capital access, and high-risk aversion, has resulted in deals of smaller magnitude.

As economies recover from the impacts of Covid-19 and pressures from inflation ease, an increase in the value of M&A deals could signal improved corporate confidence and a willingness to undertake risk. It could also indicate a healthier lending environment and the return of strong capital flows, which are crucial for economic growth in EMs.

A review of the relationship between urbanisation, elderly dependency, and GDP per capita across six major EMs suggests that increased urbanisation typically correlates with a higher GDP per capita. India, with a relatively small urban population, appears ready for future urbanisation and potential economic growth. A lower old age dependency ratio suggests a larger workforce compared to similar economies, potentially accelerating economic activity, boosting consumption, and stimulating domestic industries.

Supported by high local interest rates and climbing exports, the Mexican peso has emerged as a top performer among major currencies. The country’s record-breaking remittances and the projected growth of nearshoring initiatives further contribute to its bullish stance. Mexico’s thriving economy and conducive investment climate make it an attractive destination for savvy investors seeking favourable returns.

India’s economy is a mix of challenges and opportunities due to weak global demand and inflationary pressures. However, moderating inflation and improved global conditions are expected to support recovery.

Insular economy

• Typically, over 50% of output is due to domestic consumption, higher than peers.
  

Commodity vulnerability

• Lack of resources has led to a current account deficit as India is heavily reliant on energy imports.
  

Sensitive to price shocks.

Brazil’s economic outlook is promising, driven by rapid growth and significant reforms. Despite potential reductions in favourable interest rate spreads, Brazil’s currency remains stable.

• The swift reaction to inflation faced by the Central Bank of Brazilhas paid off.
  
• The BCB tightened over 1,000 basis points between March 2021 and April 2022.
• Annual inflation has dropped below the BCB’s target of 3.25%
• Monetary easing is expected to be implemented in August.

The allure of emerging market equities has been steadily increasing in recent times. These markets have shown resilience and demonstrated impressive gains, even amidst global market volatility. With their growing economies, favourable demographics, and increasing consumer spending, emerging market equities have become attractive destinations for investors seeking long-term growth prospects.

The collective momentum of emerging markets is undeniable, propelled by energy demand, resilient equities, promising debt performance, and unique national contexts. The rise of these markets represents a compelling investment landscape that demands attention from astute investors seeking to diversify their portfolios, capture growth potential, and navigate the evolving dynamics of the global economy. By recognising the nuances and leveraging financial and economic reasoning, investors can position themselves to unlock the boundless opportunities offered by emerging markets.