Democracies provide best environment for emerging market returns

He said investments tend to flourish in democratic environments.

“When you see a shift away from democracy, this damages a whole range of checks and balances, and it typically hurts investor returns,” Cameron said. “So I think that’s one lens [with which] to look at the EM classes. Pivot towards democracies, preferably those that have a vibrant domestic free press.”

He cited Thailand, whose 2019 election was widely deemed to have been fraudulent, as an example of how deteriorating democratic ideals can lead to negative impacts for investors.

The world is becoming increasingly polarized into rival trading blocs led by the U.S. and China — countries with opposite views of democratic principles.

“There will be winners and losers in that,” he said, suggesting that companies associated with the Chinese trading bloc will have a harder time generating strong returns for long-term investors.

“As an investor, you want to seek out countries that are exposed to the U.S. trading bloc.”

In this polarized environment, he likes U.S.-friendly countries like the Philippines, Poland, Brazil, Taiwan, South Korea, and especially India and Mexico.

Despite Indian Prime Minister Narendra Modi’s faring less well than expected in recent elections, the forming of a coalition government signals India’s commitment to democracy and portends the introduction of social programs that will improve the lives of its poorest citizens.

“[This would be] a positive tailwind for consumption in that country,” he said. “I think the economy is still resilient. We’re looking still at 5%-plus GDP growth this year. Very few countries in the world are going to deliver that kind of GDP growth.”

And Indian companies continue to demonstrate they are excellent allocators of capital, he said.

“They earn very high returns on capital. They are efficient in terms of their capital expenditure, and ultimately, shareholder value creation,” he said.

As for Mexico, Cameron said it looks extremely attractive following the sell-off of the Mexican peso last year.

“Mexican stocks look historically cheap, trading on two standard deviations below their average PE,” he said.

And the “bluster” about tariffs notwithstanding, he said the U.S. relies on Mexico for its supply chain, and as a manufacturing counterweight to China. It has a pragmatic president in Claudia Sheinbaum, and a base of high-quality companies.

“Investors that can take a two- or three-year view, buying now, are going to make money on the stocks themselves as depressed valuation multiples probably normalize,” he said. “And I think there’s an opportunity to make money on the currency as well with the peso being so cheap currently.”

Beyond India and Mexico, Cameron said there are opportunities in a number of emerging-market sectors including technology (health care and computer chips) and listed infrastructure (airports and toll roads). And with growing populations and rising incomes, emerging markets offer many opportunities in consumer goods and consumption sectors.

One example is BDO Unibank, Inc., in the Philippines, where despite a large, young and increasingly skilled population, credit penetration is extremely low.

“We’ve got this opportunity for a long period of strong credit growth,” he said. “And valuations are extremely compelling. We can buy this bank — even with a strong return on equity and this very strong credit growth — for less than 10 times forward earnings.”

Cameron said investing in emerging markets makes sense from a diversification standpoint, especially given U.S. stocks are more expensive than they’ve ever been. Emerging markets, by comparison, look historically cheap.

“If we see a world where the U.S. dollar stops appreciating, maybe even moves into a bear market, then investors should be very careful with being overweight U.S. stocks in that environment,” he said.

“Having exposure to EM — particularly a selective exposure to high-quality sovereigns that are not tied into global trade, [and] that are driven by structural growth, whether it be domestic consumption or technological innovation — I think is a very appropriate positioning.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.