LOOKING beyond the headlines is critical in investing, especially when assessing emerging markets, says Pendal’s James Syme.
India and Mexico are two current examples of countries with unexpected, hidden strengths.
Rising inflation and higher commodity and energy prices are traditionally a negative for commodity importing countries like India and Mexico, says Syme, who co-manages Pendal Global Emerging Markets Opportunities Fund.
Yet he likes both countries due to domestic factors that leave them well placed to weather global economic changes.
“Mexico is a major oil producer, but a significant commodity importer that trades on the strength of its manufactured exports to the US.
“India has a long-standing vulnerability to commodity prices both through inflation and the current account balance.
“So why are we positive on these two markets?”
The reason is hidden in the domestic data.
For India, it’s the unsung strength of its computer service exports. For Mexico, it’s the record remittance income from citizens working abroad.
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“It’s easy to overlook the strength of India’s computer services exports. There’s no single trade number that captures things like IT services, software product development, business process outsourcing, data services, engineering services and the like,” says Syme.
“But there’s a central bank survey. In 2013, Indian exports of these types of services were $62.6 billion but in 2021 they were $133.7 billion.
“Because the listed companies make up so much of that market you can almost get a feel for how they are doing by extrapolating from the 20 largest listed business.
“And this year, ending March 2022, should be a really good year.”
This matters because in 2013, India’s oil imports — the key economic vulnerability traditionally feared by investors — exceed its IT services exports by $100 billion.
But in 2021, the deficit was erased.
“A significant part of India’s oil import bill is now being paid by its IT services exports — and they continue to grow significantly.
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“The India of today and the India of ten years ago are not the same country.”
Syme tells a similar story about Mexico.
As a commodity importer and manufactured goods exporter, Mexico should struggle in times of rising input prices.
But the overlooked factor is the huge and growing remittances being sent home by Mexicans abroad.
“Lots of countries have income from citizens who work abroad, but for Mexico, remittance income is really big. Family remittances were $52 billion in calendar 2021.”
These remittances almost entirely come from the US, where tight labour markets, especially for low paid workers, are proving “exceptionally positive for the Mexican economy”, says Syme.
“One of the main things Mexico exports is Mexicans. Being adjacent to the US is Mexico’s secret strength.
“Like IT services in India, it’s been a story of steady growth. In 2021, remittances in Mexico were up 25% on the calendar year before.
“It doesn’t show up in the trade balance — but we think you have to take it into account.”
James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.
The fund aims to add value through a combination of country allocation and individual stock selection.
The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.
The stock selection process focuses on buying quality growth stocks at attractive valuations.
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