1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 136
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
companies look to bypass global supply chain disruptions. Notably, U.S. import dependence on
Mexico surpassed that of China in 2023. It’s worth noting that to strengthen its position in
upcoming USMCA negotiations, Mexico has approved tariff increases on imports from India,
China, and other Asian countries. One risk of imposing tariffs on China is that companies from that
country may reduce or cancel investments in Mexico. Overall, Mexico is likely to continue
benefitting from U.S. companies’ reshoring operations, although the impact of Mexico’s recent
tariffs remains to be seen.
Chile enters 2026 with a constructive outlook, supported by resilient growth, disinflation, and
strong institutional flows. However, valuation constraints and political uncertainty (particularly
regarding congressional distribution) remain risk factors for the region. The December win by
right-wing candidate José Antonio Kast points to a market-friendly administration starting in
March. However, reform delays or congressional deadlock, due to political divisions, may dampen
sentiment. The equity market surged 51% in 2025, supported by strong earnings, copper prices,
and institutional inflows. Although earnings growth and high copper prices are positive, current
valuations, near 10-year average of ~13.0x, suggest limited upside.
Peru enters 2026 with solid macro fundamentals which are supported by low inflation, strong
commodity prices, and private investment. However, political volatility and recurring pension fund
withdrawals remain key risks. Moreover, the unexpected removal of President Boluarte
underscores Peru’s institutional fragility. The 2026 presidential race remains highly uncertain, with
no clear frontrunner and nearly half of voters undecided. Peruvian equities trade at a significant
discount versus fundamentals, with strong copper/gold prices and high infrastructure spending
providing tailwinds, but political uncertainty and liquidity risks temper optimism.
Several other emerging markets appear relatively well positioned for 2026. India benefits from
favourable demographics that support productivity and consumption, accelerating digitalization,
and resilience despite geopolitical tensions. South Korea also stands out, given potential
governance reforms, thematic AI exposure, and a cyclical recovery in areas like memory. Notably,
Korea has some of the highest fiscal 2026 consensus earnings growth estimate among major
emerging markets. Exhaustive analysis of other individual emerging markets adds limited
incremental value. This is because while other EMs delivered a strong 2025 – fueled by resilient,
though uneven, growth across regions, a softer U.S. dollar, falling global benchmark rates, and
improving liquidity conditions, which incentivized foreign investments, intensifying upside
momentum.
In terms of valuation, several emerging markets are trading at a discount to their 5- and 10-year
average multiples. However, forward looking projections are mainly driven by political and macro
factors, which are inherently even more uncertain in these economies (i.e., Brazil and Peru).
Accordingly, exposure should be anchored by a thematic, bottom-up security selection
framework, particularly around AI and the energy transition.
Overall, within EMs, long-term investors may find higher conviction structural themes supportive
of increased exposure to Chinese and Indian equities. Brazil and Mexico also remain wellpositioned to benefit from supply-chain reshoring, though this requires ongoing monitoring.
135
