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The best performing EMs may surprise you

Whilst the economies of Mexico and India, two markets typically favoured by investors for their embrace of reforms, are performing relatively well in comparison to those such as Brazil’s, other emerging markets such as Peru and Russia are providing better investment opportunities for investors.

Jun 10, 2016 // 8:41AM

Both the Mexican and Indian economies are expected to continue to grow this year, outperforming many of their EM peers. Mexican GDP growth grew by 0.80% in Q1 2016, and India’s growth rate is expected to remain at 7.20% for 2016.

“India is on track to be one of the strongest EM performers this year,” said Roxana Huela, Vice President of EM strategy at Societe Generale.

India’s currency has remained relatively stable versus the US dollar. It is currently trading at 66.6924 to the dollar.

Although the rupee should perform better than the currencies of its EM Asian neighbours, the market friendly governor of the Reserve Bank of India, Raghuram Rajan could be replaced after his term ends in September, which could end up negatively affecting the currency’s performance.

Contrary to the rupee, Mexico’s peso is down by over 7.5% against the US dollar since April, and has been the worst performing currency across EMs and Latin America in particular, second only to Venezuela’s bolivar. It currently stands at 18.2836 to the dollar.

Lower oil prices and US political activity have hampered Mexico’s currency. External factors play a more influential role in Mexico than in India, including when it comes to the performance of both countries’ debt.

“The Mexican economy will be affected by the outcome of US election. India on the other hand is more of a closed economy, so is less affected by external factors,” said Claudia Calich, Fund Manager and Head of EM Debt at M&G Investment Management.

“Mexico’s strong fundamentals mean it has avoided recession and has been growing at lower but still positive rate. Reforms have also been implemented to open investment opportunities in the oil and energy sector but regardless, the peso has been one of the worst performing currencies across EMs,” said Daniel Moreno, EM Portfolio Manager at Rubrics Asset Management.

The Brazilian real is up 15% this year, but Mexican peso has remained flat.

“The 15% performance differential is quite significant,” Moreno added.

The relatively strong performance of the Mexican economy has not translated into the performance of the country’s foreign currency-denominated debt. Although Brazil’s economy is in a worse situation than Mexico’s when it comes to technicals and political risk, so far this year its debt has been performing noticeably better.

Brazil, alongside Russia has been a stronger performer and is more appealing than Mexico from an investment perspective, according to Moreno. 

“Brazil and Russia are the best performing EMs at present because their fundamentals and the investor sentiment regarding these countries that had driven these markets to extreme underperformance over last 2 years are turning around.”

Russia in particular has seen a dramatic turnaround in the performance of its economy, which has peaked investors interest, evident in the country’s successful sale of a US$1.75bn Eurobond last month.

“In Russia, dollar bonds are now trading better than they were two years ago when the crisis started. The country has been one of the best performers across EMs over the past 12 months, which is unlikely to change soon.”

Moreno said the variables were stacked in Russia’s favour.

“The macroeconomic situation is turning around, the currency has stabilised, inflation has come down dramatically, growth is picking up slightly, corporates have reduced their level of debt, the government has still very low levels of debt and oil prices have picked up. Overall the case for Russia is very compelling.”

Calich noted that elsewhere in EMs, Argentina was moving in the right direction, but added that the country was starting to get expensive in terms of valuations, which could dampen interest.

“Peru will also look strong with the centre right pragmatic Kuczynski appearing to have won the election,” she added.

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