If you are not willing to risk the unusual, you will have to settle for the ordinary.Jim Rohn
After a decade of disappointing returns, emerging markets are once again positioning themselves as an interesting alternative for international investors. Joe Biden’s victory in the presidential election represents a return to a more traditional foreign policy in the United States, which could imply the re-implementation of trade policies that favor global trade. This, coupled with an environment of extremely low interest rates in developed markets, as well as positive demographic, political and economic factors in emerging markets, makes this sector once again attractive for large fund managers.
Bank of America’s Global Fund Manager Survey for the month of November 2020 shows a much stronger perception of optimism than in previous months; news about the progress of a possible coronavirus vaccine is consolidating the expectation of a faster economic recovery. This has caused a rotation in recent weeks towards other types of shares in the main world stock exchanges, putting a pause in the optimism surrounding Technology and “Stay-At-Home Economy” shares, which have benefited so much from the pandemic, to now focus on companies linked to the recovery of the real economy, including those from emerging markets.
The term “emerging market” has been in use for more than thirty years but there is still no fully accepted definition. The famous World Bank economist Antoine van Agtmael popularized the term in the 1980s, as a practical way to avoid calling them “third world countries”, but also to capture those markets with an agenda of structural reforms aimed at the liberalization and modernization of their economies.
Although there is no definitive rule, we can say that emerging markets are characterized by greater volatility than a developed market, as a consequence of political instability, external shocks, currency devaluation, and generally weaker political and social institutions, as well as greater potential for economic growth and capital returns. Emerging markets benefit from policies that seek growth of their middle class and their domestic market, generating new demand for products and services. McKinsey estimates that by 2025 half of the world’s population will be within some sort of middle class scale, increasing consumption in emerging markets to $ 30 trillion USD per year.
Emerging markets are an excellent alternative to diversify investment portfolios, mainly because their performance is almost always different from that of developed markets. For example, the decade from 2010 to 2019 was very disappointing for emerging markets, with the MSCI index posting an average annual return of 3.7%, while the S&P 500 achieved annual returns of 13.6% in the same period. However, the previous decade (2000 – 2009) showed the opposite story, with the MSCI Emerging Markets Index achieving annual returns of 9.78%, while the S&P 500 registered -0.95% on average. Today the MSCI index recognizes 26 emerging markets, including Mexico, Colombia, Peru, Chile, Brazil, Russia, India, China, South Africa and Turkey, to name a few.
For Mexico, the great risk is that we will once again lose the opportunity to attract these large investments: The structural reforms of 2014 had the objective of making our country a more competitive and attractive market for foreign investment. However, many of these reforms have not been adequately followed up and, in many cases, there has even been an attempt to reverse them. For at least the last decade, Mexico has fallen into a trap from which we must urgently pursue an exit: We have the weaknesses and risks of an emerging market, but with rates of return and economic growth as low as those of a developed country. The transformative process to convert large sections of our lower class into middle class unquestionably requires the creation of more and better paid jobs, which are normally generated in business processes related to global supply chains. As long as Mexico continues to be a country that insists on reinventing itself every six years, the possibilities of generating results that really benefit broad sectors of the population will be ever more unlikely.
Managing Partner of Nuricumbo + Partners. His work as a consultant has focused around CFO services and challenges, in companies of all sizes, both in Mexico and abroad. He began his career at PWC. Later, he held the position of internal audit manager for Young & Rubicam and The Interpublic Group, two international advertising groups, working for five years in New York City and performing audit projects in many countries.