Despite considerable political uncertainty in many developing markets, there are promising, if sluggish, signs of reform. A long-term perspective is essential. The IMF has raised growth forecasts for emerging economies as a group to almost 5% in 2018, a pace more than double that forecast for developed nations. Given this fundamentally positive economic environment for companies to trade in, developing markets still offer excellent opportunities.
While exports remain important to China, it is encouraging that the economy is becoming more balanced. Rising real wages should boost consumption. However, little has been done to target the country’s opaque financial system, which has been destabilised by years of debt-fuelled stimulus. Investors may have to live with piecemeal rather than fundamental reform in China, as the authorities appear more comfortable reacting to specific problems rather than addressing structural issues.
India’s economy is fairly well insulated from global changes, relying far more on internally generated growth. It has therefore come to be regarded as something of a refuge for emerging market investors. The economy is growing by over 7% and, by some estimates, has exceeded even Chinese growth rates. This provides a solid basis for further progress in modernising the country’s business and commercial infrastructure, and an encouraging environment for investors.
In Latin America, Brazil, too, is making some progress on domestic reform, although painful spending cuts are likely to be deeply unpopular. Mexico’s economy is also reviving after the jolt to confidence which it received from the election of Donald Trump.
In the long term, McInroy & Wood believes that there are particularly attractive investment opportunities to be found in the emerging markets. This reflects our view that economic gravity is to some extent shifting away from the developed economies of the world towards the developing ones. The latter are benefiting from favourable trends in demographics, liberalisation, and capital and technology flows. The result has been a superior rate of economic growth in much of the developing world, and we expect this to result in rising profit growth and good stock market returns in the future.