According to Sean Taylor, chief investment officer at Matthews Asia, emerging markets can be a good place for investors to put their money, but problems can arise when so-called “tourists” enter the market.

He cited the Russian invasion of Ukraine in 2022 as an example. The Russian stock market immediately became uninvestable, and fund managers had to zero out any assets they held in the country.

While no one could have predicted the war, he noted that “experts were not caught off guard” by Russian assets because they saw problems looming on the horizon.

He noted that it is global funds that “catch” the situation because they do not worry about valuations if they are growing.

“The problem for emerging markets is tourists,” Taylor said, referring to the perceived risk associated with the asset class.

One area where this has been repeated is Latin America, where the economy has grown in recent years on the back of rising commodity prices.

The IA Latin America sector was the second best sector among Investment Association (IA) companies last year, second only to the IA Technology & Technology Innovation sector.

The company was second behind IA Commodity/Natural Resources in 2022, but its strong performance in those two years was the result of a weak 2021 in which IA Latin America’s peer group was the worst performer in the category, falling 11.5%.

Those still trading LatAm this year have been caught out again. The sector has been the worst place for investors to put their money so far in 2024, with the average fund down about 14.8%.

YTD sector results

Source: FE Analytics

“That was where people were hiding last year. It was a good structural story. The growth in the U.S. was working, and people were moving to Latin America as a result, deciding to underweight the larger Asian markets like Korea, Taiwan and China,” Taylor said.

“This situation clearly reversed at the beginning of the year, when people started to trust Asian countries’ results more.”

Matthews Asia became more cautious on Latin America late last year as strong performance in the region meant valuations were relatively high compared to Asian alternatives.

But valuations aren’t the only problem. He highlighted two countries in the region as examples of why the asset class as a whole is struggling.

Mexico is first, up 36.3% in three years. So far in 2024, the market is down 15%.

YTD sector results

Source: FE Analytics

The country has seen growth thanks to positive rhetoric from the United States, with President Joe Biden recognizing the need to move manufacturing closer to home and away from Asia – and China in particular.

“Mexico is one of the best structural stories in emerging markets,” Taylor said, because of its “access to the U.S.,” and its exports “are taking on China.” Add to that its “low levels of digitalization and financial penetration,” and it could be a long-term winner.

But it has its problems. So much so that “investment banks have downgraded the currency and the stock market because that structural story is being questioned,” Taylor said.

The market has recently sold off due to political instability, specifically the inauguration of new President Claudia Sheinbaum Pardo, who is expected to win a clear majority of votes in October.

She replaces Andrés Manuel López Obrador, also known by his initials AMLO, but Taylor said there were concerns the new president would be more “radical” than her predecessor.

Additionally, concerns about “how much influence AMLO will have over her,” as well as the last Cabinet meeting in September under the current administration, are raising nervousness.

Finally, the US elections could also bring big problems for the country, as former President Donald Trump will likely campaign on an anti-Mexican platform, just like he did the last time he won the election.

“I don’t think he’s going to do anything to Mexico, but between now and the election, the word is that Trump is going to hit Mexico,” he said.

The Brazilian market has followed a similar trajectory to the Mexican market in recent years: growth in 2022 and 2023, but decline in 2024.

He said that “the corporate environment in Brazil is great, but the overall political and global environment is difficult.”

President Luiz Inácio Lula da Silva is a controversial figure and there are concerns he could have influence over the central bank, which recently voted to cut interest rates – although the vote was split.

“There will be a change in the central bank in January. Who will Lula bring in? If he brings in one of his friends, wages will have to be cut because of the currency,” Taylor said.

However, the country “has a better balance sheet” and “is better run” than Mexico, and it’s “really cheap.”

Of the two, Taylor said Brazil “will be an interesting market at the end of the year” based on its low valuations. If Trump returns to the White House later this year, “it will probably favor Brazil over Mexico,” he said.