EM Monthly: Why globalisation 2.0 could favour emerging markets

November 12, 2024

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Globalisation’s bumpy road is resulting in a new world order that could significantly benefit emerging markets, as Warren Hyland explains.

Globalisation can be defined as a system enabling people, businesses and economies to become interconnected and interdependent on a global scale. Among the potential benefits are economic growth, job creation, wider access to resources and lower prices.

Meanwhile, the sharing of information, technology and capital can improve living standards. Global collaboration is also the only effective solution to address issues related to climate change, social welfare and security.

However, in recent history, this model has been challenged as financial crises exposed economic vulnerabilities as volatile capital flows destabilised financial markets.

Politicians, frustrated by the loss of sovereignty, have led populist movements against open borders. The failure of emerging economies, particularly China, to progress towards democracy has increased global dependency on autocratic governments, with little regard for intellectual property and human rights. Extreme weather, civil and trade wars and a global pandemic have also revealed the risks of being too reliant on single suppliers from distant shores.

Many have become disillusioned with the first version of globalisation. Mutual benefits and maximum efficiency are out. Globalisation 2.0 (G2) prioritises security and a focus on doing business domestically or with reliable partners in countries aligned with one's government. Diversification and nationalism have taken centre stage.

G2 is triggering a reallocation of capital across global supply chains, with reshoring and nearshoring (friendshoring) becoming a key priority. This shift, combined with trade tensions and sanctions, has further accelerated the natural movement of supply chains. In an attempt to identify the potential winners of G2, we examine evidence from multinational company surveys, trends in foreign direct investment (FDI) and shifts in trade patterns.

EM countries a major beneficiary

The Association of Southeast Asian Nations (ASEAN) stands out as a key beneficiary, alongside India and Mexico (Figure 2). The factors that help attract the reallocation of capital include established free trade agreements (FTA), large domestic markets, ease of doing business with a preference to be closer to home and the need to minimise disruption, be it from labour, infrastructure or security.

The US and China, meanwhile, continue to play critical roles as primary or secondary trade partners, underscoring the importance of deepening trade links to securing ongoing capital flows (Figure 3).

 

Vietnam is considered ASEAN’s frontrunner, leveraging its cheap labour force and strong US ties. US exports have increased fourfold since 2013 and Vietnam is now the seventh-largest goods supplier to the US.¹

Trade protectionism is seen as low risk, further encouraging investment from China in response to circumventing tariffs. Chinese firms such as Chery, Great Wall Motor and SAIC Motors intend to build photovoltaic and electric vehicle (EV) manufacturing plants, while HP plans to transfer a significant portion of laptop production from China.² Other sectors that have seen supply chain growth include energy (solar panels) and chemicals.

Other ASEAN countries benefiting from G2 include Malaysia, a mature export manufacturing hub known for its pro-business environment, light regulations and commitment to trade. Malaysia has signed 16 FTAs, including major agreements with Japan, South Korea and India, alongside FTAs with other ASEAN members.³

These agreements have been pivotal in enhancing Malaysia's trade activity, with approximately 67% of its total trade conducted with FTA partners, while trade with the US and European Union comprises a significant share of the remainder.³ The country has been a beneficiary of the growth of the semiconductor industry, with recent investment from Infineon, Intel Corp and Texas Instruments, and has seen a steady growth in exports in electrical and electronics products, alongside machinery and palm oil-based goods.³

For Indonesia, G2 presents an opportunity to break free from the commodity trap – the overreliance on raw material exports for immediate revenues at the expense of developing higher-value products. In recognition, the Indonesian government has implemented policies to encourage domestic processing and value-added manufacturing. Since 2014, Indonesia has enforced a ban on unprocessed nickel exports, prompting significant investment in domestic nickel smelting and processing facilities.

In 2023, this strategy extended to bauxite, with copper concentrates following in 2024. Nickel is essential for EV batteries and stainless steel and is central to Indonesia's plan to move further downstream. By developing domestic battery manufacturing—and potentially even EV production—Indonesia aims to establish itself as a critical player in the EV and green energy supply chain.

Thailand is often seen to have the strongest potential, driven by a young, cost-effective labour force. However, recent challenges, including the economic impacts of the pandemic and ongoing political instability, have hampered progress.

Despite these obstacles, Thailand continues to attract substantial investment, particularly from China and the auto sector. Leading Chinese firms such as Changan, GAC Aion, and Hozon Auto have committed to EV manufacturing plants in Thailand, aiming to leverage its strategic location and emerging EV ecosystem.

Additionally, global automakers like BMW are also considering expansion in Thailand, capitalizing on the country’s growing infrastructure and supportive policies for the EV industry.³

Note: References to specific companies are for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account.

Beyond ASEAN

Two other countries frequently cited as prime destinations and major beneficiaries of G2 are India and Mexico.

India's appeal for international businesses lies in two primary factors: its young, educated workforce and its expansive domestic market. With an estimated manufacturing compensation cost of US$4.20 per hour in 2024,⁴ India is significantly more cost-effective than many of its competitors in reshoring, attracting manufacturers looking for economical yet skilled labour.

Moreover, India’s consumer spending on goods was US$1.29 trillion in 2024, with annual growth expected to reach 7% over the next five years, signalling substantial market potential.⁴

India is aggressively increasing its electronic manufacturing capabilities, aided by targeted tariffs and production-linked incentives to attract investment in smartphone and device production. Apple, for example, has significantly boosted iPhone exports from India, with nearly US$6 billion worth of India-made iPhones shipped in the first half of this fiscal year, an increase of one-third from the previous year. Exports are on track to exceed US$10 billion for fiscal year 2024.⁵

Growth is also accelerating in other export sectors, for example, with projected annual growth rates of 9.5% for apparel, 8.8% for household and electronic appliances and 8.5% for transport equipment over the next five years.⁴ This underscores India's strategic role as a production hub, positioning it as a pivotal G2 player.

Mexico’s strategic location and US-Mexico-Canada (USMCA) FTA make it an ideal nearshoring destination for international businesses wishing to access US consumer markets. Mexico is heavily invested in the automotive sector, including trucks, passenger vehicles, EVs, EV batteries, and automotive technology. Notably, global capital goods companies such as South Korea’s Doosan Bobcat, Canada’s Linamar Corporation and France’s Safran have also expanded operations in Mexico to better serve North American markets.

Additionally, electronics firms are eyeing Mexico as its computer and electronics sector could be poised to benefit from recent US policies like the Inflation Reduction Act and the Creating Helpful Incentives to Produce Semiconductors and Science Act. These initiatives could incentivize foreign firms in these segments to establish operations in Mexico, capitalizing on the supply-chain integration between the US and Mexico.

Note: References to specific companies are for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account.

Figure 4: Supply chain reconfiguration by country and sector*

Source: Nomura Anchor Report, Asia’s new flying geese, as of May 28, 2024. Others refers to Cambodia, Myanmar, US, Germany and Europe. *Results of Nomura’s bottom-up survey of companies - the total sample count is around 130 companies. The sample covers company-related media reports published between 29 January 2023 and 3 May 2024. Latest available data used. For illustrative purposes only.

Unlikely European beneficiaries

While Europe may not be an obvious beneficiary of G2, two countries worth watching are Türkiye and Kazakhstan. Türkiye, uniquely positioned between Europe and Asia, serves as a natural trade bridge and benefits from its favourable demographics, with a median age of 33 and a sizeable labour force.⁶

Sectors such as transport equipment manufacturing and textiles look particularly well-positioned to benefit from reshoring efforts, as companies look for alternatives to Asian manufacturing hubs.

Kazakhstan, though perhaps controversially, is gaining due to the Russia-Ukraine conflict, emerging as an alternative trade route, facilitating goods that bypass Russia and avoid trade sanctions.

Challenges of China decoupling

There are undoubtedly challenges ahead. China’s unique combination of scale, quality and competitiveness on costs makes it difficult for the world to fully detach from its economic influence. To capitalize on the potential of G2, EM countries will require strong political commitment and regulatory improvements, alongside increased public and private sector investment to address critical infrastructure, technology and security concerns.

Additionally, advancements in artificial intelligence and robotics look likely to play an increasingly pivotal role in the coming decades, diminishing the comparative advantage of emerging economies that rely on abundant, low-cost labour and traditional assembly lines, which are becoming ever more mechanized. As a result, education and skill development will be essential for nations to remain competitive in a rapidly evolving global economy.

The month in credit

Rising government bond yields was the dominant theme for fixed income in October, on the back of robust economic data and looser fiscal policy expectations.  Although the environment was poor for government bonds, it remained supportive for risk assets, allowing high yield to outperform investment grade and credit spreads to outperform government bonds on a global basis.

EM corporates outperformed EM sovereigns and US credit, BBBs outperformed single-As, and Asia was the best-performing region.

Within high yield, single-Bs generated a positive total return with outperformers including distressed Chinese property credits, Ukrainian corporates and Latin American cable operators, as the rating’s category’s shorter-duration characteristic provided protection from higher rates. 

By sector, real estate was the standout, as Asian and Eastern European property developers continued their price recovery on the back of looser monetary policy. Consumer goods underperformed, although this was primarily because of the sector’s higher-quality/longer-duration bias.

Primary market activity continued into October with US$47 billion of issuance, well above the US$39 billion 5-year monthly average. However, net supply was barely positive at +US$1 billion. Year-to-date, the EM corporate universe has shrunk by US$25 billion.⁷

In terms of macroeconomic and geopolitical news, Türkiye continues to be on the watchlist as officials discussed whether bypassing tax rises on goods in the new year could help control inflation in-line with the central bank’s short-term targets.

Hungary’s economy technically entered recession after a second consecutive quarter of GDP contraction, attributed to declines in the industrial, construction and agricultural sectors.⁸

In South Africa, the government announced its 2024 medium-term budget policy statement. The consolidated budget shortfall is forecast at 5% of GDP for the current fiscal year through March. That compares with 4.5% in February and is bigger than most economists had forecast. However, this shortfall is seen as narrowing year-on-year into 2028. However, the National Treasury remains on course to achieve a primary budget surplus – where revenue exceeds non-interest expenditure – in the current fiscal year and is projected to increase over the medium term.⁹

Past performance is not a reliable indicator of current or future results.

Moving to Latin America, Argentina’s economic recovery continued with nine consecutive months of fiscal surplus totalling 1.7% of GDP,¹⁰ due to successful spending cuts as part of President Javier Milei’s austerity plan to balance the country’s 2024 budget. The government also secured US$8.8 billion of funding from the World Bank and Inter-America Development Bank to take pressure of the central bank’s 2025 reserves and negotiated a US$2.7 billion buyback with banks to cover debt maturities due early next year. 

Moody’s upgraded Brazil’s credit rating to Ba1 on better-than-expected growth and economic and fiscal reforms. However, the IMF revised its outlook on the country’s public debt, projected to reach 97.6% by 2026, which would coincide with the end of President Luiz Inácio Lula da Silva’s term.¹¹ Meanwhile, Lula’s ruling PT party performed poorly in local elections, although it is unlikely to impact the incumbent administration’s governability. 

In Mexico, Q3 growth increased 1% quarter-on-quarter, driven by domestic demand and increasing US trade. However, the IMF expects growth to slow from 1.5% to 1.3% next year due to persistent structural constraints.¹² Newly elected President Claudia Sheinbaum took office in October, promising ongoing financial support to state-controlled energy company Pemex, which continues to struggle due to falling revenues.¹³ By month end, Sheinbaum had passed reforms to renationalise Pemex and CFE as part of an energy reform programme.¹⁴

Chile’s central bank continued monetary easing with another 25bps cut in October, bringing rates down to 5.25%.¹⁵ Meanwhile S&P increased the country’s ratings outlook to ‘stable’ and affirmed the country’s A/A-1 rating, citing “fiscal and monetary policy that have helped stabilise economic performance”.¹⁶

Colombia’s central bank was also in easing mode, cutting rates by 50bps to 9.75% - its eighth consecutive cut.¹⁷ Peru’s central bank kept rates on hold at 5.25% and announced a more gradual approach to rate cuts as it evaluates inflation on a month-by-month basis.¹⁸

Moving to Asia, relations between India and China improved following the signing of a border agreement to end a stand-off following military clashes in July 2020 over the disputed Himalayan border. This was quickly followed by the first meeting in five years between Prime Minister Modi and President Xi Jinping, which took place at the recent BRICS summit in Russia.

On October 20, presidential power in Indonesia transitioned to Prabowo Subianto after February’s election. Sri Mulyani Indrawati, the Finance Minister under former president Joko Widodo, retained her role in Prawbowo’s first cabinet, largely seen as a move to reassure financial markets of continuity in the country’s financial policies.

An ASEAN regional power grid become more of a reality in October. Singapore is set to double its electricity import capacity with the addition of 100MW from Malaysia. This increases the total import capacity to 200MW via the Laos-Thailand-Malaysia-Singapore power integration project. Singapore, which faces higher power prices compared to its regional neighbours, has already signed agreements with Indonesia, Cambodia and Vietnam to import 5.6GW of clean electricity by 2035.

In China, a state-funded semiconductor lab reported a breakthrough in the development of silicon photonics, an emerging alternative technology to today’s current high-end chip designs. Instead of using electric signals, silicon photonics rely on optical signals. Manufacturing such chips would mean not having to rely on extreme ultra-violet lithography machines, which are restricted for sale into China.

Note: References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account.

What to watch in November

• Romania – first round of Presidential elections November 24, with parliamentary elections on December 1.
• Mexico - President Claudia Sheinbaum’s administration publishes its 2025 budget, expected November 15.

Credit

Past performance is not a reliable indicator of current or future results.

Source: ICE data platform. as of 31st October 2024. EMGB - ICE BofA Emerging Markets External Sovereign Index EMCB - ICE BofA Emerging Markets Corporate Plus Index,  EMIB - ICE BofA High Grade Emerging Markets Corporate Plus Index, EMHB - ICE BofA High Yield Emerging Markets Corporate Plus Index, Q690 - ICE BofA Custom Emerging Markets Short Duration Index, EMRA - ICE BofA Asia Emerging Markets Corporate Plus Index, EMIA - ICE BofA High Grade Asia Emerging Markets Corporate Plus Index, EMHA - ICE BofA High Yield Asia Emerging Markets Corporate Plus Index , EMRL - ICE BofA Latin America Emerging Markets Corporate Plus Index, EMIL - The ICE BofA High Grade Latin America Emerging Markets Corporate Index, EMHL - ICE BofA High Yield Latin America Emerging Markets Corporate Plus, EMRE - ICE BofA EMEA Emerging Markets Corporate Plus Index, EMIE - ICE BofA High Grade EMEA Emerging Markets Corporate Plus Index, EMHE - ICE BofA High Yield EMEA Emerging Markets Corporate Plus Index,. Index performance is for illustrative purposes only. You cannot invest directly in the index. Indices selected provide best proxy for highlighting performance of emerging market corporate bonds. For illustrative purposes only.

Market Data - Yield to Worst

Source: ICE data platform. as of 31st October 2024. EMGB - ICE BofA Emerging Markets External Sovereign Index EMCB - ICE BofA Emerging Markets Corporate Plus Index,  EMIB - ICE BofA High Grade Emerging Markets Corporate Plus Index, EMHB - ICE BofA High Yield Emerging Markets Corporate Plus Index, Q690 - ICE BofA Custom Emerging Markets Short Duration Index, EMRA - ICE BofA Asia Emerging Markets Corporate Plus Index, EMIA - ICE BofA High Grade Asia Emerging Markets Corporate Plus Index, EMHA - ICE BofA High Yield Asia Emerging Markets Corporate Plus Index , EMRL - ICE BofA Latin America Emerging Markets Corporate Plus Index, EMIL - The ICE BofA High Grade Latin America Emerging Markets Corporate Index, EMHL - ICE BofA High Yield Latin America Emerging Markets Corporate Plus, EMRE - ICE BofA EMEA Emerging Markets Corporate Plus Index, EMIE - ICE BofA High Grade EMEA Emerging Markets Corporate Plus Index, EMHE - ICE BofA High Yield EMEA Emerging Markets Corporate Plus Index,. Index performance is for illustrative purposes only. You cannot invest directly in the index. Indices selected provide best proxy for highlighting performance of emerging market corporate bonds. For illustrative purposes only.

References

1.S&P Global, Look Forward Emerging Markets: A Decisive Decade, volume 7, as of 16th October 2024.
2.Nomura Anchor Report, Asia’s new flying geese, as of 28th May 2024.
3.Malaysia Ministry of Investment, Trade and Industry, Trade performance for January 2024
4.S&P Global, Look Forward Emerging Markets: A Decisive Decade, volume 7, as of 16th October 2024.
5.Bloomberg, as of 28th October 2024. Apple ships US$6bn of iPhones in big China shift.
6. S&P Global, as of 3rd May 2024. Research update: Türkiye upgraded to B+ on economic rebalancing; outlook positive.
7.JP Morgan, Global Credit Research, as of 1st November 2024. EM Corporate Supply Technicals, October 2024.
8.Bloomberg UK, as of 30th October 2024. Hungary’s economy plunges into recession on industry slump.
9.Republic of South Africa, National Treasury Dept, as of 30th October 2024. Medium term budget policy statement.
10.The Rio Times, as of 18th October 2024. Argentina achieves nine consecutive months of fiscal surplus.
11.The Rio Times, as of 23rd October 2024. IMF predicts significant increase in Brazil’s public debt-to-GDP ratio.
12.Reuters, as of 1st November 2024. IMF sees Mexico’s economic growth slowing to 1.5% this year.
13.Reuters, as of 29th October 2024. Mexico’s Pemex posts wider third-quarter loss, hit by weaker peso.
14.Mexico Business News, as of 31st October 2024. President Sheinbaum restores PEMEX, CFE as public entities.
15.Reuters, as of 18th October 2024. Chile central bank cuts rate 25bps, sees more easing ahead.
16.Bloomberg UK, as of 15th October 2024. Chile keeps Latin America’s top rating as S&P raises outlook.
17.Bloomberg UK, as of 31st October 2024. Colombia cuts key rate to 9.75% as fiscal risks spook market.
18.Central Banking, as of 11th October 2024. Peru unexpectedly pauses easing cycle.

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co are as of November 2024 and may change without notice.

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Index descriptions

EMGB - ICE BofA Emerging Markets External Sovereign Index tracks the performance of US dollar and euro denominated emerging markets sovereign debt publicly issued in the major domestic and eurobond markets.  Qualifying securities must have risk exposure to countries other than members of the FX-G10, all Western European countries and territories of the US and Western European countries.

EMCB - ICE BofA Emerging Markets Corporate Plus Index tracks the performance of the US dollar and euro denominated emerging markets non-sovereign debt publicly issued in the major domestic and eurobond markets. Qualifying issuers must have risk exposure to countries other than members of the FX G10, all Western European countries, and territories of the US and Western European countries.

EMIB - ICE BofA High Grade Emerging Markets Corporate Plus Index is a subset of the ICE BofA ML Emerging Markets Corporate Plus Index (EMCB) including all securities rated AAA through BBB3, inclusive.

EMHB - ICE BofA High Yield Emerging Markets Corporate Plus Index is a subset of the ICE BofA ML Emerging Markets Corporate Plus Index (EMCB) including all securities rated BB1 or lower.

Q690 - ICE BofA Custom Emerging Markets Short Duration Index tracks the performance of short-term US dollar and euro denominated emerging markets non-sovereign debt publicly issued in the major domestic and eurobond markets.

EMRA - ICE BofA Asia Emerging Markets Corporate Plus Index is the subset of the ICE BofAML Emerging Markets Corporate Plus Index, which includes only securities issued by countries associated with the region of Asia, excluding Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan.

EMHA – The ICE BofA High Yield Asia Emerging Markets Corporate Plus Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BB1 and lower with a country of risk within the Asia region.

EMIA -  The ICE BofA High Grade Asia Emerging Markets Corporate Plus Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BBB3 and higher with a country of risk within the Asia region.

EMRL - ICE BofA Latin America Emerging Markets Corporate Plus Index is a subset of The ICE BofA Emerging Markets Corporate Plus Index including all securities issued by countries associated with the geographical region of Latin America.

EMIL - The ICE BofA High Grade Latin America Emerging Markets Corporate Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BBB3 and higher with a country of risk within the Latin America region.

EMHL - ICE BofA High Yield Latin America Emerging Markets Corporate Plus is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated sub-investment grade based on the average of Moody's, S&P and Fitch, and with a country of risk associated with the geographical region of Latin America.

EMRE - ICE BofA EMEA Emerging Markets Corporate Plus Index is a subset of The ICE BofA Emerging Markets Corporate Plus Index including all securities issued by countries associated with the geographical region of Europe, the Middle East and Africa including Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan.

EMIE - ICE BofA High Grade EMEA Emerging Markets Corporate Plus Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BBB3 and higher with a country of risk within the Europe, Middle East and Africa regions.

EMHE - ICE BofA High Yield EMEA Emerging Markets Corporate Plus Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BBB3 and higher with a country of risk within the Europe, Middle East and Africa regions.

The MSCI EM Index is a free-float weighted equity index that captures large and mid cap representation across emerging market countries. The index covers approximately 85% of the free float-adjusted market capitalisation in each country.

LDMP - ICE BofA Local Debt Markets Plus Index is designed to track the performance of emerging markets sovereign debt publicly issued and denominated in the issuer's own currency.

J0A0 - The ICE BofA ML US Cash Pay High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt, currently in a coupon paying period that is publicly issued in the US domestic market.

C0A0 - The ICE BofA ML US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market.

HE00 - The ICE BofA ML Euro High Yield Index tracks the performance of EUR dominated below investment grade corporate debt publicly issued in the euro domestic or eurobond markets.

ER00 – The ICE BofA ML Euro Corporate Index tracks the performance of EUR denominated investment grade corporate debt publicly issued in the eurobond or Euro member domestic markets.

CLCURFGB Index – Global Copper Refined Total Production - Yearly. This sector contains the copper production data for Chile, release by COCHILCO.

Important information

Muzinich and/or Muzinich & Co. referenced herein is defined as Muzinich & Co., Inc. and its affiliates. Muzinich views and opinions.  This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall. Emerging Markets may be more risky than more developed markets for a variety of reasons, including but not limited to, increased political, social and economic instability; heightened pricing volatility and reduced market liquidity.

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