While investors are by now quite familiar with the struggles in the emerging markets and the reform agendas of China and India, we think these issues overshadow a more interesting topic: reform initiatives elsewhere in the emerging markets that aim to develop domestic engines of growth. While not always successful, the benefits of reform are significant. Not only can they provide a powerful driver of growth, but in doing so they can also provide insulation from:
Tightening U.S. Fed policy
China’s painful economic transition
Falling trade and weak commodity prices
In other words, if done correctly, structural reform can act as an important buffer against the issues that have hampered EM performance over the past several years.
The government reform “sweet spot”
In our view, the economies of many of the larger EM markets remain hamstrung due to their exposure to commodities, U.S. Fed policy, and/or a lack of policies that support domestic growth. In contrast, markets such as Mexico, Indonesia, Argentina, and the Philippines are all in the process of implementing reform-led initiatives that should allow them to benefit from growth within their own borders in the near term (i.e., over the next 1–5 years), while also being somewhat protected from volatility sources elsewhere in the world.
At this intersection of policy reform, policy independence, and insulation from falling commodity prices, we believe there is both near- and longer-term opportunity.