The outlooks for China and Mexico are promising for 2016.
China’s growth is expected to slow, but there will likely be ongoing consumer strength, says Michael Reynal, a portfolio manager at Sophus Capital (formerly called RS Investments). Sophus Capital sub-advises the Renaissance Emerging Markets Fund. For example, auto sales improved in the second half of 2015 and should remain strong in 2016.
Also, there are reforms occurring in many areas of the Chinese economy, he says, including at the fiscal, social and enterprise levels. As a result, “You’re seeing an opening of the market; in particular, of the bond market. [And], you’re seeing increasing adoption of the renminbi as a global currency. At the fiscal level, the government is becoming more restrained and demanding of the municipal areas.”
One of China’s biggest social changes has been the government replacing its one-child policy with a two-child policy. What’s more, “You’re seeing changes in registration and citizenship requirements, which will enable more labour mobility and, hopefully, productivity gains. Lastly, at the enterprise level, there are very strong inidications that Beijing will no longer tolerate [the practice of] of loss-making industries being supported by local governments.”
Reynal says the country’s social changes are most significant because the Chinese labour force is aging and will need to be replenished. Plus, going forward, a spike in the use of technology and robotics would “drive the ongoing earnings of the tech space,” says Reynal.
Why Mexico is attractive
“[Mexico is] tied into the U.S., [which] is doing reasonably well,” says Reynal. And, he expects the 2016 U.S. federal election “could boost spending in the U.S. Following that, we’re [predicting] a pick-up in spending in housing and other infrastructure projects.”
Aside from benefiting from U.S. growth, Mexico has a young, educated labour population that has been able to tap into productivity gains.
Futher, Mexico is developing some interesting companies, says Reynal. “You’re seeing emerging-market versions of developed-market companies. For example, you’re seeing low-cost airlines developed in Mexico [that] improve on the model we see in the U.S.”
Mexican energy reforms are also appealing. Reynal explains, “People have discounted [these reforms] on the back of lower oil prices, but [they] go far beyond simply pumping oil. [The reforms] go into how you [should] handle energy, including the electricity value chain and all the infrastructure linked to that.”
The most promising area of the Mexican market is the consumer sector, he adds, and some industrials are attractive. Also, Reynal suspects we may see a rally of cyclicals and materials. “As the margin of global growth continues to pick up—and as the market becomes more confident in the Chinese economy—we could [see] a cyclical turn-around and pick-up in materials and energy prices in the second half of the year.”