(Runtime: 6 min, 21 sec; size: 4.16 MB)

Related article

Text transcript

Michael Reynal, chief investment officer of Sophus Capital.

Brazil and Mexico had very divergent environments in 2018. Brazil benefited from the elections of President Bolsonaro and the stock market did exceptionally well as a result in the last quarter. On the other hand, Mexico, who also had an election, had Mr. López Obrador come in. Mr. López Obrador is a known socialist and was feared by the markets. We subsequently saw the Mexican market sell off quite dramatically in the second half of the year.

So, what’s going to happen in 2019 and 2020? In the case of Brazil, Mr. Bolsonaro is expected to deliver pension fund reform and following that, further government reform to improve productivity and competitiveness in the market. While we’ve already seen some jitteriness because of some corruption scandals, because of some favouritism, we do expect to see this pension fund reform come through probably in the third quarter of 2019. This will be a huge positive for the Brazilian market. Why? Because the Brazilian pension system is already on the brink of bankruptcy, and this is costing the government and the entire economy far too much.

Once we see that reform come through, that will allow for liquidity, lending, and a pickup in economic outlook. Brazil has had nearly four years of recession and it’s time for the economy to move. Mr. Bolsonaro is hopefully the right person to deliver that. So, while we’re a little cautious in the very short term, having done exceptionally well in the second half of 2018, we’re very excited to see Brazil emerge out of this recession. We’re happy to see growth start to pick up in the latter half of 2019 and we’re looking for a significant pickup in 2020 in economic activity, and hence in the stock market outlook.

In the case of Mexico, it’s rather more interesting. Why? Because AMLO, which is how Mr. López Obrador is known, Andrés Manuel López Obrador, is a known left-wing element in the political system. He is also a pragmatist, however. So, while he came in and initially introduced some very negative ideas, such as attacking the banking system and closing the main airport or the main project for a new airport outside of Mexico City, he’s also somebody who wants to promote economic activity, in particular amongst the poor and the working classes.

This would be great. Why? Because the reality is that the Mexican economy is very concentrated at the very top. It’s very oligopolistic. We would love to see that economy broaden out and wealth trickle down. We’re seeing opportunities in Mexico, primarily in the consumer space and in the industrial space. It was good to see Mr. Trump and Mr. López Obrador come to an agreement on free trade. It’s good to see that while there’s been a lot of discussion on the whole, the direction is for continued integration of those economies. Again, we’re looking for positive opportunities, primarily industrial, primarily in trade, and primarily in consumption in Mexico for this year.

Where else are we excited? The Chilean economy continues to be very robust. Chile has quietly delivered high growth for years, and we’re still looking for growth between 3% and 4% in 2019 and 2020. While that particular market is somewhat expensive, it is also very high quality. We see opportunities in consumption, retail, malls, and possibly in the pulp and paper space.

What’s happening in China? What about the trade war? Will the economy continue to grow? The answer is, China continues to do well. The economy should grow above 6% in 2019 after 6.4% in 2018.

What is driving the Chinese economy today? Consumption, consumption, consumption. The era of trade-driven growth is behind us. The era of infrastructure-driven growth is behind us. Today, China is primarily a consumption story. We continue to see urbanization of the Chinese population. Specifically over the next decade, decade and a half, we’ll see another 200 million people move from rural China, the countryside, to urban China, the cities. They will live in new apartment buildings. They will have refrigerators. They will buy motorcycles and possibly cars. They will open bank accounts and they will consume clothing, food, etc. The story of China, then, is a story of consumption, and the growth that we see going forward, while slower than that that we’ve seen in the past, is higher quality and is more friendly to the foreign investor.

What about trade? We hope, we expect to see an agreement reached between the United States and China. Both sides have too much to lose for this trade tussle to become an all-out war. We expect further integration between U.S. corporate and Chinese corporate activity. We expect U.S. companies to have better, easier access to the Chinese market. The rule of law will be applied to not just Chinese companies, but also foreign companies operating in China.

We hope to see, for example, American and Canadian banks operating freely in China. That’s not the case today. We hope to see U.S. and foreign tech companies own and operate 100% separately from Chinese counterparts. What this will mean is that China becomes a profitable growth market for foreign investors and ultimately, that’s what the U.S. would like in these trade negotiations. What does that mean for the stock market? A lot of the fears will be eroded. The upside that we see from a more stable capital flow will be delivered, and we’ve seen that so far this year.

The Chinese stock market is one of the best performing markets in emerging markets and one of the best performing markets in the world. The increase in liquidity by the introduction of the A-share market into global indices is wildly exciting, and we’ve seen a frenzy of activity and interest in the last year around that space.

Renaissance Emerging Markets Fund
Related Article