HSBC PB’s Esty Dwek sees Mexico, Turkey and South Korea as key EM plays

Esty Dwek, investment strategist at HSBC Private Bank, has picked out Mexico, Turkey and South Korea as high conviction emerging market plays.

Our preference for the emerging market (EM) assets – be it equities, bonds or currencies – is a well known fact, and we recently further upgraded our view on EM equities to positive, as we expect the region to outperform in the coming months. In this piece, we highlight a few high conviction countries within the emerging markets which we expect to generate strong performance.

Frequent readers of our publications will have seen our recent upgrade to emerging market (EM) equities as a region. The reasons for this upgrade were detailed in this publication two weeks ago; namely superior economic growth, growing earnings and still attractive valuations. Today, we dive into a few of our high conviction views within the emerging markets.


We have held a constructive view on Mexican equities for some time, and we continue to believe that they will be strong performers in the coming months. The economic outlook remains strong, with growth on par with its long-term average and benign inflation so far. The central bank is therefore expected to remain on hold. Another supportive factor for Mexican equities is the new
government that was elected at the end of last year. With it have come big expectations for reforms, in particular on the fiscal side. This is only adding to an already bright future.

In addition, the Mexican market has shown a very high correlation to the US stock market. We believe this will continue to be a supportive factor as our view on the US remains positive. Some ongoing discussions about fiscal consolidation in the US may lead to some short-term volatility in the next few months, but we believe that the growth outlook coupled with accommodative monetary policy will continue to support the US, and with it Mexico.

We acknowledge that valuations are quite rich, especially compared to other emerging markets, but Mexican equities have been more expensive for some time and have continued to perform well. In addition, we believe that the news flow and momentum remain positive, which should allow Mexican equities to perform well despite current valuations.


Turkish equities were one of the best performing equity markets in 2012, supported by an improvement in investor sentiment thanks to the European Central Bank’s actions to reduce tail risks in the eurozone. However, we believe that the momentum is still strong and that the recent strong performance can continue, especially after a healthy consolidation at the start of this year. Indeed, much of last year’s performance was a compensation for 2011 losses, and we still see upside potential from here.

In our view, a lot of good news is coming from the Turkish economy. The growth outlook is strong and inflation appears under control, at least for now. More importantly, we believe that the central bank has regained credibility and is managing developments well. Further, the significant improvement in the country’s current account deficit – with a reduction from approx. 9% to 6% – has led to foreign inflows, supporting the currency and the equity market. This was further supported by the upgrade by Fitch of Turkey’s credit rating to investment grade, boosting sentiment toward the country in general.

Valuations remain reasonable, in line with their five-year average – they only seriously re-rated in 2009. In addition, earnings growth appears to be coming through, which should support further advances by the market.

South Korea

We believe that South Korean equities are likely to benefit from improvements in the growth prospects of the US, especially once fiscal consolidation discussions end. Indeed, South Korean equities tend to follow their US counterparts, although not to the same extent as Mexico. Nonetheless, we expect South Korean equities to catch up from their recent consolidation as investor sentiment improves globally. We also expect the South Korean economy to benefit from the improvement in Chinese growth, which seems to have bottomed in Q3 2012.

We also believe that the technology sector, a large part of the South Korean market, will have significant upside potential, following the correction it is currently experiencing. Indeed, South Korean companies have a strong global brand recognition, which should continue to generate investor interest.

Valuations remain reasonable even if they are slightly above their long-term average. One element which could impact the South Korean market’s performance is ongoing and significant JPY weakness. As JPY weakens, South Korea’s competitive advantage for exports diminishes, which could hurt the market’s returns. However, we believe that much of the move may have already occurred, at least for the time being, and that a stable JPY is manageable for South Korean exporters.


We believe that the combination of strong growth potential and strong earnings growth with still-reasonable valuations is likely to lead to the outperformance of EM equities compared to other regions. Within EM, we believe that a few countries, such as Mexico, Turkey and South Korea, are likely to generate positive returns in the coming months and we maintain our constructive view.


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