While not without their own risks, emerging markets (EMs) represent a diverse and unique opportunity for active investors. Their structural advantages include attractive demographics and technological leadership in high growth industries including AI and the electrification of transportation.
Investors in EM can buy companies with exposure to these themes at attractive valuations and a clear pathway to higher earnings. Over time, such characteristics should be recognised by the market, leading to a rerating of their valuation and narrowing the valuation discount relative to developed markets.
Brazil
Brazil, with a population of 210 million, is the largest economy in Latin America. While traditionally known for its exposure to commodities, it has also seen companies emerge in advanced technologies like small aircraft manufacturing and industrial automation. It offers attractive investment opportunities in a diverse range of industries including the financial, commodity and health care sectors. We are particularly attracted to the shareholder return policies of companies in the energy and financial sectors.
Despite these opportunities, Brazil also faces challenges, in particular public debt and inflation. Defying the trajectory of most central banks, Brazil has raised interest rates to control inflation as well as to support currency. We believe that higher interest rates are a short-term phenomenon and their direction could follow the trends for lower rates globally in due course.
Mexico
Mexico has been in the spotlight following the election of President Trump due to tariffs and his stated goal of renegotiating the USMCA. The original trade agreement and its precursor, NAFTA, unleashed significant foreign direct investment (FDI) in Mexico. Total FDI in 2024 was US$37bn, with the US accounting for almost half of this investment.
Mexico has benefited from the rise in nearshoring following President Trump’s first term. Its role as a large low-cost manufacturer of US autos and consumer goods makes it an integral part of the US supply chain and one which will not be easily replaced. Despite the uncertainty creating short-term equity market volatility, we continue to see attractive and diverse investment opportunities in the Mexican financial and auto parts industries.
Saudi Arabia
A key attraction for investors in EMs is their rapidly expanding middle class. This theme is well established in markets including China and India, and an increasingly important one in Saudi Arabia.
Liberalisations and reforms similar to those undertaken in other EMs have been pursued by Saudi Arabian policy makers in recent years. As well as labour market reforms, there has been a liberalisation of foreign direct investment rules, tax reform and a significant expansion in tourism infrastructure.
While liberalisation and reforms have reduced the risk from fluctuations in energy prices, they have not been eliminated. The implications of oil prices are significant for Saudi Arabia given its high share of oil and gas in GDP and noting that 62% of the government’s fiscal revenue came from oil in 2024. We remain cautious on Saudi Arabia due to its reliance on oil prices for economic growth.
By Chetan Sehgal, Lead Portfolio Manager of Templeton Emerging Markets Investment Trust (TEMIT)
