Investment cycles
When analysing broad equity market performance drivers, there are certain tailwinds we can look for.
For example, increasing capital expenditure, or ‘capex’, can be a sign of a healthy economy. This is because it shows businesses are investing in future growth by upgrading their long-term assets. Semiconductor factory tools, EV (electric vehicle) batteries and expanding solar panel manufacturing plants are all reflected in the capex numbers. Capex investment helps businesses grow and can lead to a pick-up in employment and incomes across an economy. This, in turn, can feed through to higher consumer spending. All this helps to boost corporate earnings and drive share price returns.
There are some additional capex benefits in emerging markets (EMs). Large informal sector participation, limited financial inclusion and, in some markets, less advanced technology, means there’s significant potential for growth once capex picks up.
Recently, we’ve seen an uptick in global capex, driven by massive investment in technology, the ‘green transition’ and ‘nearshoring’ (chart 1). Interestingly, rising global capex spending has historically boosted EM performance, as raw material extraction and the production and assembly of these long-term assets are often carried out in EMs.
Chart 1: Global capex correlated with EM equity performance
Source: DataStream Refinitiv, CLSA, September 2024.
Majestic Mexico
To the end of May 2024, Mexican equities outperformed the MSCI World Index over three years. In this case, the investment cycle has been spurred by ‘nearshoring’. Specifically, companies have been relocating to Mexico as a means of diversifying their supply chains and moving closer to end-consumers in the US. This has contributed to a marked increase in construction-related fixed asset investment in Mexico (Chart 2).
Chart 2: Gross capital formation in Mexico (2000-22)
Source: Jefferies, November 2023.
The faster businesses invest in new capital equipment – tools, transportation assets, and even electricity – the faster they tend to grow. This activity also benefits the broader economy. The growing output of Mexican firms is reflected in the country’s increasing share of trade with the US. Commercial property vacancies also came down materially from the end of 2021 onwards.
Chart 3: Change in % share of US imports, by selected country (2017-23)
Source: abrdn Global Macro Research team, March 2024.
Now, we’re also seeing employment and incomes rising for the Mexican population, which in turn has implications for consumption and company earnings.
Chart 4: Mexican real wage growth, % year-on-year
Source: abrdn Global Macro Research team, September 2024.
As a bottom-up investment manager, we've observed these positive trends across several Mexican companies . Take leading Mexican bank Banorte. Its second-quarter 2024 results confirmed a pick-up in loan growth, with auto and credit card loans increasing by 23% and 24% year-on-year, respectively. The company is set to deliver around 10% of earnings per share growth in 2024.
India burning bright
India is the next big EM outperformer on a three-year basis. The country is increasingly benefiting from geopolitics, reduced fiscal/trade imbalances and significant investment in infrastructure and property. Prime Minister Narendra Modi retained power in the recent general election, although he’s had to form a coalition to govern. We view this as a more benign outcome, likely leading to the continuation of Modi’s pro-market initiatives. Notably, a string of key reforms in the past decade have laid the foundation for improved Indian long-term growth…
| Year | Measure | |
| 2016 | Bankruptcy code | Clean up of corporate/banking balance sheets |
| 2016 | Real Estate Act | Clean up of the housing sector |
| 2017 | Goods & services tax roll-out | Simplified taxation, improved collections |
| 2014 - ongoing | Infrastructure development |
Physical - Roads, railways, airport Digital - Aadhar, , Direct Benefit Transfer |
… and in this environment, a capex cycle upturn is underway in India…
Chart 5: India fixed investment as a % share of its GDP
Source: MOSPI, CEIC Data, Jefferies, March 2024.
Increasing fixed investment is helping to drive economic growth, with India’s GDP (gross domestic product) rising faster than its peers. The consumer picture is also positive. India is now the most populous country on the planet. Government spending is boosting jobs and the corporate sector. As a result, India’s consumption growth over the last decade has outpaced China and the US.
Chart 6: Annual consumption growth (%) by selected country
Source: CEIC, Haver, UBS, 2024.
Power Grid Corporation of India is one of our highest-conviction holdings and a clear play on the Indian capex story. The company forms the backbone of India’s electricity infrastructure, planning and managing the national grid network in conjunction with several regions. It is responsible for transmitting about a half of all the electricity in India.
Power Grid is increasingly promoting access to renewable energy. More than 20% of its capital spending or capital work is earmarked for renewables. This outlay is expected to rise in the coming years, in line with the government’s ambitious renewable targets for the electricity sector. Importantly, Power Grid's earnings are on an impressive trajectory. Coupled with a consistently high return on equity (in the high teens), this makes it an ideal pick from a quality perspective.
Chart 7: Power Grid Corporation financial performance 2022-2027
Source: Refinitiv Datastream, Financial year ending March. Estimates from August 2024. INR in Millions.
Putting everything together
We’re excited by the capex growth story unfolding across EM ex-China. The resulting positive effects – from incomes to consumption – are having a profoundly constructive impact on the companies we research and engage with. That’s why we believe the EM ex-China equity asset class can offer lots of exciting opportunities for investors.