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David Kimberley
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Updated 29 Dec 2023
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This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

Last week, as I trawled through John Lewis for some last minute Christmas presents, I ended up listening to an interview with Louis Gave of Gavekal fame. One of the questions put to him was what he would consider investing in today, given his view that we are potentially facing a period of higher inflation and an economic downturn.

Some of the responses were roughly what you would expect – gold, equities, physical assets. A more surprising take was Latin American government debt. Given LATAM often seems like the region that never misses an opportunity to miss an opportunity, buying government bonds issued in the region may raise some eyebrows.

However, Louis argued that central banks in LATAM, being accustomed to higher inflation, have become more adept at dealing with the phenomenon. There is certainly some truth to this. Central banks across Central and South America were quick off the bat to hike rates, pre-empting the US. To take one example, Brazil’s inflation rate has fallen precipitously over the last two years and the country’s central bank has already started to cut rates.

That is not conclusive evidence that we should all be rushing out to buy LATAM government bonds. But it is arguably an indication that stereotypes and assumptions about past performance don’t necessarily fit with today’s reality. As one of my colleagues put it earlier this year, the sarcastic dismissal ‘this time it’s different’ hardly matches with regulatory warnings that past performance isn’t indicative of future results.

Indeed, we see that across emerging markets today, with sweeping changes taking place which mean the sector is likely to look very different in the next decade or so relative to the period we’ve had since the start of this century.

The last two decades have been very much a China-driven story. That is no longer the case. China is not an incredibly cheap place to manufacture goods any longer and the huge infrastructure building out we’ve seen over the last 20 years is not going to repeat itself. Add in US tensions and investors in China face a very different proposition to what we have seen over the last couple of decades.

Other emerging market economies such as India, Vietnam, and Mexico are benefitting from this trend, as companies seek to relocate manufacturing hubs or to set up processes for re-exporting goods so as not to fall foul of political tensions.

At the same time, India and Indonesia are both seeing rising incomes and GDP growth. This has resulted in more opportunities in sectors like financials, which are something of a growth play compared to developed markets, given many people are opening accounts, using credit cards, or buying insurance for the first time. India is also seeing huge growth in its technology sector, while Indonesia is benefitting from a boom in demand for nickel.

Over in Europe, the Greek financials sector is also looking a lot more attractive than it did a decade ago. However, this is much more of a value play. Balance sheets are strong and asset quality is much better than it was in the wake of the financial crisis. Despite this, valuations remain low in the sector.

As you can likely infer from this very brief snapshot of just a few areas of the sector, emerging market managers have their work cut out. Investing across the whole world, in wildly divergent economies and cultures, is no mean feat – particularly when nothing is fixed and there are lots of moving parts.

That’s one of the reasons we highlighted Fidelity Emerging Markets’ (FEML) research team in a recent note on the trust. Few managers have the level of coverage that FEML has at its disposal, meaning the managers can take full advantage of the opportunities that emerging markets offer. That does not mean smooth sailing but in an extremely dynamic and changing market, it is hard to see that research team being anything but an asset to the FEML team in the years ahead.

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