China, India and LATAM, a combination of recovery, growth and political risk management
The recovery in China may be more muted than investors expect
Brian Coffey, Fund Manager, Latin America and MEA at NS Partners, Sub-investment managers of the Nedgroup Investments Global Emerging Markets Equity Fund, says that while they are positive on China post the lifting of their Covid Zero policy, they believe that a continuing consumer rebound might be more muted than many investors expect, especially in the medium term.
“Globalization is not over and China will continue to play a major role in providing exports to the world. However, with President Xi now firmly ensconced in his position and likely to serve a fourth term, it is likely that the trade tensions between the US and China will persist. This makes us less positive on China in the medium term,” he says.
Coffey also explains that although the reversal of the Covid Zero policy is an economically encouraging move and presents opportunities across technology, healthcare, infrastructure and consumer goods - they are nevertheless more cautious on the outlook for China than a lot of investors.
“It's important to realize that China has been in a limited lockdown for the past two years. Therefore, this reopening isn't a pan-national reopening. Essentially, we think they are lifting the restrictions and allowing herd immunity to develop. So, while there may be some consumer rebound, we don't anticipate a massive rebound. China is also seeing higher levels of wages which will be a challenge for industries that rely on low input costs – like manufacturing,” he says.
India is the most exciting economy in the world
India, as one of the world’s fastest growing economies is well placed to benefit from increased outsourcing as rising wages in China prompt companies to look elsewhere. “We're very encouraged about the outlook for India, it’s the most exciting economy in the world right now. India has the resources and the human capital to develop significant pharmaceutical and software services industries to name a few,” he says.
India's young and growing population, economic reforms, strong economic growth, innovative spirit, and infrastructure development make it an attractive investment destination for investors looking for long-term growth potential.
“It’s a country that's got a huge domestic potential market, although it does require much more growth and much more income redistribution for it to match China. Nevertheless, it's one of the most exciting in the world,” he says.
“We don’t think that the tensions between China and the US will be the main driver of increased sourcing of exports from India. Rather, we think that rising wages in China will start prompting companies to start outsourcing to India. There is also good institutional quality which will however be tested by how the government deals with Adani. Still we think India is the long-term winner from what's going on in China, but we think it was a long term, major opportunity for global investors regardless of China.”
Indonesia well positioned for knock-on growth effects
Indonesia has the largest Muslim population in the world with a strong rule of law. It also has a significant market and resources and lower income per capita. This makes it an attractive outsourcing location. Mexico and Vietnam are also countries that could benefit from similar dynamics.
LATAM region shows potential if political risk can be navigated
Coffey says that while they see potential pockets of opportunity in the LATAM region, the biggest concern for the outlook of the LATAM economies is the dramatic political shift to the left.
“Some emerging markets like Brazil have been very proactive in terms of getting ahead of the inflation curve so we think inflation will subside in those regions, rates will come down and we will see growth in those economies. However, we have also seen a trend of ‘business unfriendly’ ruling parties staying in office in places like Brazil, Columbia, Chile and Mexico which is something we will keep an eye on in terms of taking advantage of opportunities when the timing is right.”