Observations in Emerging Markets: A Range of Opportunities Part 1

Observations in Emerging Markets: A Range of Opportunities Part 1

Elle Wu:          I am Elle Wu, a client portfolio manager here at Thornburg Investment Management.  I am here today with Josh Rubin.  We’ll be speaking today about his observations in emerging markets.  So, Josh, now that we are midway through the year, how have the markets performed versus your expectations at the beginning of the year?

Josh Rubin:     Honestly, I think we should have re-set our expectations at the beginning of the year, and what I mean by that is, markets never go according to plan and we just need to remember to acknowledge that but every year we are excited.  We think we know what’s gonna happen, and then it doesn’t turn out that way.  So, I think what we’ve seen, especially in emerging markets is this balance where we, in some places, we’ve seen accelerating momentum that we weren’t expecting.  In other places, we’ve seen a little more softness, but in particular, China got going a lot faster than we were anticipating at the beginning of the year.  Now, uh, people are resetting expectations and the Chinese markets have softened again.  At the same time, other parts of the world, like Latin America or somewhat in Southeast Asia, higher interest rates or some of the fears that were happening because of US or developed market financial system strain haven’t turned out to be such a decelerator and so those markets are doing well, both on a stock perspective and from an economic-momentum perspective.

Elle Wu:          And, something that I wanted to focus on is the theme of outsourcing, which was a big thing coming into this year.  I mean things like China Plus One, near-shoring happening in places like India and Mexico.  Can you go into what your expectations are for both those countries as we head through the rest of this year?

Josh Rubin:     Absolutely.  I think in the context of outsourcing near-shoring, friend-shoring, what we’re actually seeing is a real elevation in news flow but sort of a steady cadence in actual changes on the ground, and what I mean by that is, even before some of the more recent geopolitical tensions, or even before the trade war starting in 2017, there already was a move of Chinese manufacturing into Southeast Asia and Mexico certainly was a very steady trading partner for us, and so, what we’re seeing today is absolutely continued investment, and to some degree, some accelerating investment, uh, in Mexico, but overall it’s not an accelerated outflow of manufacturing jobs, or manufacturing activity from China.  Southeast Asia continues to grow but I wouldn’t call it accelerating.  The talk about India as an outsourcing opportunity is very high but the actual level of activity on the ground is not necessarily accelerating and then in Mexico we’re sort of this balance point where the interest levels are higher than they have been, but the actual degree of investment spend or planning is still in the early stages, so I think 2024, 2025 are probably when we’ll really see Mexico get going.

Elle Wu:          Oh, thank you for that, um, and what are your expectations for the rest of the year?

Josh Rubin:     I think overall the world is coming to grips with different forms of stability or predictability.  And what I mean by that is, there’s not really the question of is the Fed gonna cut right away, but people are becoming more comfortable with the idea that interest rates in the US now just remain higher for longer, but at least there’s some predictability to just where they’re likely to go.  Same thing with macro-policy, trade policies, etc. in a lot of the world, and the result of that is, I think we’ve probably been in the period maybe for 12 to 18 months where earnings mattered less than expectations around sentiment, and we’re moving back into a period where earnings begin to matter because people can say, if the backdrop isn’t changing that significantly, I can really trust the underlying things happening within companies.  Trust their earnings, trust the earnings outlook, and that that should be a big driver for stock prices and, and financial markets in the back part of this year.

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