1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 135
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
and automation, and electrification. China also has exposure to less AI-intensive industries like
agriculture and construction, which partly makes it more sensitive to slowing population growth.
In terms of manufacturing, finished goods exports have been rising, a trend that accelerated postpandemic. While trade relationships are shifting, broad-based deglobalization is subject to longer
term implementation timelines. Instead, global trade is evolving, with China redirecting exports
away from the U.S. toward ASEAN, the Middle East, and the E.U. Given this context, Chinese
companies with an increasing mix of global sales (versus those already heavily skewed), are well
positioned.
A closer look at the Chinese consumer reveals several shifts in purchasing behavior, most notably
lower overall goods consumption. This reflects a more mature consumer base that increasingly
prioritizes experiences over material goods. This trend is also reinforced by greater conservatism
among young consumers amid a challenging macro backdrop – including slower economic growth,
property-related investment losses, and elevated youth unemployment. This implies a greater
share of discretionary spending being directed toward travel, dining, and entertainment. At the
same time, consumers are placing greater emphasis on factors beyond price, with increased
willingness to pay for quality, which supports experiential spending and a potential rebound in
premium demand. However, broader macro headwinds, including trade tensions and a weak
property market, are likely to continue weighing on consumer confidence and related stocks.
Overall, persistent deflationary pressures, a weak real estate market, and lower investment activity
suggest that a 2026 broad-based consumer recovery in China will remain limited, with select
opportunities across specific sectors and more premium segments.
Latin American Equities
After an exceptional year of returns in 2025, Latam continues to benefit from some structural
trends and projects, including infrastructure development – i.e., transport, energy (particularly
renewables), telecom projects – and urbanization. However, several key challenges remain. The
region needs to invest 3%+ of GDP per year to 2030 to meet the sustainability development goals
(including investments in electricity, transport, telecom, etc.), which is 70% above historical levels,
while managing the impact of U.S. tariffs which will significantly increase the cost of construction
materials and potentially result in cancelled projects. Moreover, elections and policy reversals can
disrupt country-specific progress.
In Brazil, sentiment is broadly positive, driven by expectations for lower interest rates as inflation
moderates, albeit from elevated levels. However, offsetting this is one of the highest public debt
burdens among emerging markets, at ~95% of GDP, and sensitivity to the 2026 election cycle,
which adds uncertainty around fiscal policy, interest rates (with Brazil among the last major EM
central banks to ease rates), and the Brazilian Real. On the other hand, though heavily dependent
on the outcome of the October election, BRL appreciation, which may appear undervalued relative
to historical levels, alongside macro stabilization, could act as a catalyst. However, given the
concerns discussed, Brazil continues to trade at a discount compared to its historical averages,
and relative to EM peers.
Mexico continues to trade at a discount to historical levels. Its geographical proximity to the U.S.
remains a structural advantage and is likely to support further gains in 2026 – as U.S. and non-U.S.
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