Investments thrive in democratic settings. When democracies decline, it often weakens important checks and balances, which can harm investor returns. Looking at emerging markets, it makes sense to focus on democracies, especially those with a lively free press.
Take Thailand, for example. Its 2019 election faced accusations of fraud, highlighting how a weakening democracy can negatively impact investors.
The global trading landscape is becoming more divided, especially between the U.S. and China, two countries that view democracy very differently. In this split, some companies linked to China may struggle to provide good long-term returns. For potential investors, seeking opportunities in U.S.-aligned countries is wise.
Some nations that stand out include the Philippines, Poland, Brazil, Taiwan, and especially India and Mexico. Despite recent political challenges in India under Prime Minister Narendra Modi, the creation of a coalition government shows a commitment to democracy and hints at social programs aimed at helping the poorest citizens. This could boost consumption in the country.
India’s economy remains strong, with expectations for over 5% GDP growth this year, a remarkable figure globally. Indian companies are also showing strong capital management, achieving high returns while effectively managing expenditures.
Mexico presents an attractive opportunity as well, particularly after a recent dip in the value of the peso. Stocks in Mexico are trading at low price-to-earnings ratios, presenting a good buying opportunity. Despite concerns about tariffs, Mexico plays a crucial role in the U.S. supply chain and offers a solid base of high-quality companies led by a pragmatic government.
Investors looking to buy now with a medium-term view may see good returns as the market stabilizes, both from stock value recovery and by benefiting from a cheaper peso.
Beyond India and Mexico, the emerging markets hold promise in several sectors like technology, healthcare, and infrastructure, including airports and toll roads. With populations growing and incomes rising, consumer goods and related sectors are ripe for investment.
A case in point is BDO Unibank in the Philippines. Despite having a young, skilled population, credit penetration is still low, suggesting a long window for significant credit growth. The valuations are appealing; the bank can be bought for less than ten times its future earnings, offering an attractive investment opportunity.
Emerging markets also provide diversification benefits, especially since U.S. stocks are at historically high prices. With the possibility of the U.S. dollar losing ground, investors should reconsider heavy investments in U.S. stocks. Instead, exploring emerging markets, especially those with stable governments and strong growth potential, could be a smart move.