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LATAM – CHINA : A YIN YANG CONCEPT

Latin America and China couldn’t express more clearly the Yin-Yang concept: so different but interdependent at the same time.

Having benefited of the commodities bonanza years in the 2000’s, Latin America is now painfully feeling the boomerang effect of China’s economic deceleration.

The boomerang effect after the commodities bonanza years

Last July, the IMF severly downgraded the economic outlook of Latin America (0.5% in 2015 – 1.7% in 2016) and this is obviously not surprising due to a global context that’s definitely penalizing this part of the world. China’s deceleration, commodities price slump and prospects of increased interet rates in the US are weighting heavily on the region’s growth prospects.

While these economic factors are definitely affecting the region, Petrobras related troubles in Brazil have been giving the final “knock out” effect to the region. With such a backdrop, Latin America and more generally emerging markets felt out of sight of most investors as additional corrections cannot be overshadowed.

Emerging markets remain the global economic locomotive

China’s economic deceleration rang an alarmist bell in investors mind, therefore leading to massive emerging markets outflows. Latin America in particular has been particularly slashed down but other emerging markets had to cope with the same feat. However, and without undermining the current gloomy backdrop, emerging markets potential remain one of the strongest at global level.

Representing about 50% of global GDP (PPP terms – IMF), emerging markets are also home of about 80% of the world’s population. Even if developed economies recover from the recession, the global economic growth will continue to be strongly influenced by the growing middle-class in emerging markets.

Services and consumption: engine motor of emerging markets economic growth

Long time commodities dependent, emerging markets are gradually shifting towards consumption and services driven economies – From Africa to Latin America and going through South East Asia, foreign direct investments have experienced a steady rise and are not anymore exclusively dedicated to the commodities sector: retail, real estate and services (healthcare, education, financial) are on the verge of becoming the new sector’s growth engine of emerging markets.

Emerging markets economic slowdown remains a relative one

China has been dominating the headlines over the last weeks because of the significant plunge in the country’s shanghai index. Although a hard landing cannot be totally dismissed, chinese authorities benefit from financial tools that should help the country overcome this economic shift.

Considering all the above, there is no doubt that emerging markets offer the greatest potential of investment return should the portfolio be properly diversified as growth prospects can dramatically differ from one country to another. As such, passive investment strategies seem pretty limited due their lack of stock picking strategies. Investing in emerging markets can be extremely rewarding but requires from a portfolio manager a set of 4 features: local market expertise, active management and a savvy macro understanding.

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