Emerging Markets End 2019 on a High Note

Three Things We’re Thinking About Today

  1. Optimism surrounding the government’s economic agenda has resulted in a more favorable investment climate in Brazil. The Brazilian market outperformed its emerging market (EM) counterparts with a 14% gain over the fourth quarter 2019 and 27% increase for the year, both in US dollar terms. While the country’s economic recovery has been slower than expected, government and central bank efforts are improving the country’s longer-term growth potential. Inflation has remained under control, allowing the central bank to ease rates to record lows to stimulate the economy. We believe social security reform is key to stimulating investment and credit, which should help improve economic activity and significantly reduce Brazil’s fiscal deficit. A major privatization plan has also been announced, and tax and other structural reforms should improve the ease of doing business.
  1. Trade and slowing growth fears have largely overshadowed China’s initiatives to strengthen and diversify its economy. The government’s focus on economic restructuring and long-term sustainable growth has led to an acceleration in the implementation of structural reforms and widespread industry consolidation, as well as the development of local supply chains in the technology space to replace US sources. China will be a frontrunner in the fifth-generation wireless technology arena (5G) and is expected to have some 600 million 5G subscribers by 2025, or about 40% of the forecasted 1.6 billion subscribers globally.1 Together with artificial intelligence (AI) and robotics, this should help drive growth in China’s new economy as it strives to become less reliant on the United States. In our view, China will emerge from this challenging period stronger and more self-reliant, with multiple pillars of economic support.
  1. Kuwait is undergoing a multi-year effort to introduce fiscal reforms, increase investment and diversify away from oil dependence. In December, index provider MSCI stated that Kuwait met all the necessary requirements for reclassification to EM status and will be added to the MSCI Emerging Markets Index in May 2020 with an estimated weight of 0.69%. With substantial reserves, low levels of debt and a stable banking sector, we think Kuwait stands out among its peers. Add to this a budget breakeven oil price of just US$49 a barrel for 2019—the lowest by some margin in the region—and a AA2 credit rating, we believe Kuwait could be considered an attractive investment destination in the Middle East. Despite trading at a premium to its EM peers, valuations in Kuwait remain reasonable, in our view.


Much market noise and conflicting signals dominated 2019. While some of these uncertainties may persist in the near term, we believe it is essential to stay the course. The markets are just beginning to realize opportunities from technology disruption and the transition of businesses away from traditional models. We believe the investment scope in the emerging world is wide and promising for investors who can overlook near-term volatility and invest for the longer term.

The International Monetary Fund forecasts EM growth will accelerate in 2020 and remain more than double that of developed markets.3 Improving fiscal, economic and monetary policies and a renewed focus on structural reforms in many EMs has been gaining traction. The EM landscape continues to transform. EM economies are more diversified now—with domestic consumption and technology offering new drivers of growth—and are growing less reliant on low-cost manufacturing and commodities.

Although US-China trade tensions have de-escalated in the short term on news of a partial trade deal and both countries scaling back tariffs, we expect the broader economic conflict to remain for some time. The impact from the trade conflict has not been limited to China. A comprehensive agreement therefore remains in the best interests of both sides. US President Donald Trump’s administration will be acutely aware of this heading into an election year in 2020.