Increasing capital expenditure (CapEx) can signify a healthy economy, as it shows businesses are investing in future growth by upgrading their long-term assets. Whether semiconductor factory tools or EV car batteries, all this can be reflected in CapEx numbers. CapEx investment helps businesses grow and can lead to a pick-up in employment and incomes, which, in normal circumstances, tends to feed through to higher consumer spending across the economy. All this should help drive corporate earnings, which can drive share price returns.

Emerging markets (EMs) also have some additional benefits to consider. Large informal sectors, less financial inclusion, and, in some markets, less technology mean that once CapEx picks up, there tends to be a steep runway for growth.

More recently, we have seen an uptick in global CapEx, driven by massive technological investment, the energy transition movement, and nearshoring (Chart 1).

Source: DataStream Refinitiv, CLSA, September 2024.

Interestingly, historically rising global CapEx spending has boosted EM performance. This is because raw material extraction and the production and assembly of these long-term assets are often performed in EMs.

Mexico’s nearshoring momentum

Since May 2024, Mexican equities have outperformed the MSCI World Index℠ over the past three years.¹ In this case, nearshoring has catalyzed the investment cycle. Specifically, companies have come to Mexico to diversify their supply chains and move closer to US end-consumers. The growth in construction-related fixed investment in Mexico prompted a spike in investment (Chart 2).

The faster businesses invest in new capital equipment, such as tools, transportation assets, and electricity – the quicker they tend to grow, benefiting the broader economy. Mexican firms' growing output is reflected in Mexico’s increasing share of trade with the US and fewer industrial sector job vacancies (Chart 3). Commercial property vacancies also came down materially from the end of 2021 onwards.

Source: abrdn Investments, Global Macro Research team, March 2024.

Now, we are also seeing the Mexican population's employment and income rise, which has implications for consumption and the earnings of consumer-oriented companies (Chart 4).

Source: Jefferies, November 2023.

India, India, burning bright

India is the next big EM outperformer from a three-year point of view. The country is increasingly benefitting from geopolitics, reduced fiscal/trade imbalances, and significant investment into infrastructure and property.

Prime Minister Narendra Modi retained power in the recent election, albeit with the need to build a coalition. We believe this is a benign outcome, and Modi’s pro-market initiatives should continue. Notably, a string of key reforms in the past decade have laid the foundation for improved Indian long-term growth, and in this environment, the CapEx cycle upturn is underway (Chart 5).

Source: MOSPI, CEIC Data, Jefferies, March 2024.

All this is helping economic growth, where India’s GDP is growing at a sharper rate than peers. From a consumer perspective, the picture is strong, too; India’s consumption growth over the last ten years outpaces China and the US.

Now, the most populous country on the planet, through continued government spending, is seeing robust consumer confidence that is helping to propel corporate earnings (Chart 6).

¹ MSCI World Index℠ is an unmanaged index considered representative of stocks of developed countries. The index is computed using the net return, which withholds applicable taxes for non‐resident investors.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

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