Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about opportunities and risks in emerging markets, with Ross Cameron, portfolio manager with Northcape Capital. We talked about regions and sectors he likes, upcoming elections, and we started by asking how he would describe 2023 from an EM-investment perspective.

Ross Cameron (RC): Well, the EM index finished the year up 7% in Canadian dollars in 2023, which doesn’t sound too bad. But, masked within that, we have to remember that the EM index ex-China was up 17% in Canadian dollars. So that headline number includes a very weak performance from China. The rest of the emerging markets actually had a pretty strong year. It was a case, in 2023, of excellent fundamentals being somewhat diluted by geopolitical concerns, particularly in the Middle East. Every year we see very large divergence within emerging markets. It’s a very diverse asset class. This is 25 countries, two-thirds of the world population, 50% of global GDP, and very, very different economies. The implication, of course, for asset allocators and investors, is you can’t just simply be a stock picker. You’ve got to have to view on the economies as well.

Regions that surprised to the upside

RC: Mexico had another good year. The Mexbol Index was up some 32% in Canadian dollars. And that’s just a structural growth story. Mexico is one of the clearest beneficiaries from the decline in U.S.-China relations. Brazil had a strong year. Brazil was up 29% in Canadian dollars. So what we’ve seen in the last couple of years is a kind of resurgence of these Latin American markets.

Themes and trends he’s watching for

RC: The big theme of 2024 is elections. A staggering portion of the global population will go to the polls this year. We’ve already seen the election in Taiwan, that’s a very important election from a geopolitical perspective. Indians will go to the polls in April or May this year. That’s of course the biggest democracy in the world. We also see upper-house elections in places like South Korea, which will have an impact on the President Yoon’s ability to push through the reform agenda that he has. Indonesia, is another country — 270 million people — that is going to the polls this year. And then, of course, Mexico will go to the polls as well, and that’s an important election. So, absolutely, the theme of this year is elections. And the challenge for fund managers is to do your homework, understand the various candidates, and position the portfolio accordingly.

What’s ahead for 2024

RC: So, I think the big picture framework for 2024 is a global slowdown. And I think that that will manifest in weak global trade. And so you want to be very careful about exposure to trade-driven economies. So Thailand is an example. Thailand runs a big current account surplus. It’s very, very reliant on external trade. I think those types of economies will struggle in an environment where the global economy is weak. So where you want to be is exposure to domestically driven economies, economies where you have the engine of strong domestic consumption. India’s an example. Indonesia is another example. And then, aside from that, you want to look for particular areas where there is structural growth, that’s not economically sensitive. So Mexico here benefits, because that nearshoring? That’s a multi-year project. It is less relevant where the global economy is because these projects, it’s like turning a giant tanker ship. It takes time. These projects are already underway. And so we expect the Mexican economy to be pretty resilient this year.

And finally, what’s the bottom line on investing in emerging markets in 2024?

RC: Every single time in history we’ve seen a declining U.S. dollar trend, that’s coincided with strong outperformance of emerging markets. And that’s exactly what we see now. On every metric that we could think of, the U.S. dollar looks very overvalued. On purchasing power parity, interest rate parity, if you look at the Dixie Index versus the long-term trend, the U.S. dollar is overdue an extended period of decline. And the flip side of that is emerging market currencies generally look very undervalued. So the bottom line is asset allocators cannot ignore the valuations we see at the moment.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Ross Cameron of Northcape Capital. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.


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Emerging Markets Concentrated Equity - segregated fund
Canada Life Emerging Markets Concentrated Equity Fund - mutual fund
Concentré d'actions des marchés émergents - fonds distinct
Fonds concentré d’actions de marchés émergents Canada Vie - fonds commun de placement