Emerging market recovery

At Tricio we believe that exposure to emerging market shares and bonds can be part of a balanced portfolio. In general, emerging markets may have less liquidity and are considered to be a higher risk investment than developed markets. These and other factors can lead to emerging markets having a higher reward for investors as well.

ETFs give more choice, but the exposure may not make sense to investors

Many years ago investing in these markets could have been a daunting process for most investors, and would have had to be done through specialist funds, which could have been expensive. The growth of the ETF industry though has lowered fund investment costs in general and has led to many specialist ETF funds giving investors wider, and in many cases less expensive, access to these markets. A lot of the ETFs track the leading emerging market indices. These may sometimes not deliver the exposure that investors think they are getting though. China, for example, has a heavy weighting in many broad emerging market share indices (25% to over 30%), but as the worlds 2nd largest economy with high-speed rails, leading technology and manufacturing industry, is it really an emerging market or just a developed market with some investment restrictions? South Korea and Taiwan are also generally included in emerging market indices and funds. Given the advanced technology, manufacturing ability and research development in these countries, they too might be considered to be developed markets instead.

Country or bloc exposure

One advantage of the increased number of funds and lowered costs is that portfolios can gain exposure to individual emerging market countries or regions. One such region that we have discussed in our Weekly Talking Points, Monthly Insights, Webinars, Focus reports and other publications is that exposure to Latin American shares over the course of this cycle may be attractive. This region saw a big tumble in 2024, with the iShares MSCI EM Latin America ETF serving as a proxy for other funds, the ETF was down over -28% in 2024.

The big country exposure of the ETF is to Brazil (50% or so) and Mexico (near 25%). These countries saw their stock markets trade mixed or lower in 2024, with their currencies dropping vs. the USD as well. The fact that this ETF, and many other emerging market funds, are USD denominated, exacerbated the losses. A lot of the negative sentiment was due to investors anticipating the incoming Trump administration would be imposing tariffs on US imports from these countries which could have led to lower economic activity.  

Sell the rumour, buy the fact

In our latest Weekly Talking Points we looked at the LTAM ETF as a classic ‘sell the rumour, buy the fact’ investment case. After the -28% drop in 2024, the ETF (in USD) is up over 20% so far this year. In local currency terms the Brazilian stock market is up over 11% and the Mexican market is up over 15%. Both currencies have gained vs. the USD so far this year as well (BRL is up over 7% vs. the USD, MXN is up over 3%), which is boosting returns.

The weekly charts below (with 13 and 50-week moving averages) show the Brazilian stock market index, USD/BRL, Mexican stock market and USD/MXN.  We favour further stock market gains, and USD weakness to extend as well.