Emerging Markets: US dollar weakness is driving opportunity in Brazil, Mexico and South Africa

US dollar weakness and domestic demand may drive an uptick in emerging markets. Pendal senior fund manager PAUL WIMBORNE dispels some of the myths and highlights the opportunities

• 2026 may see continuing weakness in the US dollar
• Tailwinds favour countries like Brazil, Mexico and South Africa
• Find out more about Pendal’s Global Emerging Markets Opportunities Fund

PENDAL’s Global Emerging Markets Opportunities team sees reasons why US dollar weakness may continue in 2026, which is expected to provide further tailwinds for countries like Brazil, Mexico and South Africa.

A common belief is that investment in emerging markets should be based on structural considerations such as increased development driven by demographics and urbanisation.

But most countries are more cyclical in nature than structural and one of the key drivers of this is the US dollar, according to senior fund manager Paul Wimborne.

“What happens to the dollar tends to determine which direction the asset class goes and whether we’re out- or under-performing developed market countries,” explains Wimborne.

“The economies, and also the equity markets, tend to perform much better in a weak dollar environment than a strong dollar environment.

“It’s typically those countries that borrow lots of money that are relying on global liquidity that tend to have more of the dollar cyclicality.”

The strong dollar environment that has persisted over the past 10 to 12 years, and resulted in economic headwinds for many emerging countries, is now shifting.

One country that Pendal’s Global Emerging Markets Opportunities team sees promise in is South Africa – a country that over the past two decades has faced difficulties over its political decisions and governance.

But last year’s election saw the previously ruling African National Congress lose the parliamentary majority it had held since 1994.

Wimborne says the move to a coalition government seems to have culminated in better decision-making and is helping drive economic growth.

“So, improving governance from a very low level but moving in the right direction –reducing things like electricity shortages and keeping the lights on,” he says.

“Lots of low hanging fruit, which has helped drive economic growth over this year and we think will continue next year.

“It’s one of those countries that has a lot of dollar cyclicality involved in its economy and its equity market.”

With the evolution of the government, South Africa’s debt dynamics are starting to stabilise, and fiscal credibility is gaining momentum as a reduction in spending leads the country to a fiscal surplus.  

A continuation of the weaker US dollar is anticipated to drive further economic growth alongside improved earnings growth.

South Africa is a commodity export focused country and the strong performance of the gold and platinum prices in the past year has been a contributing factor in the improving outlook.

The weaker US dollar and lower inflation is also playing a big role in interest rate cuts.

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If interest rates come down further, it will help drive the domestic side of the economy, says Wimborne.

“So, things like domestic demand and interest rate cyclicals, like banks, should be well placed to perform next year as well,” he says.

Pendal’s Global Emerging Markets Opportunities team employs a top-down approach because emerging markets include a diverse range of countries, with different economic drivers. As a result a given economic environment will benefit some more than others.

In emerging markets, country effects typically have a much larger impact on returns than in developed markets.  

A top-down assessment takes into consideration things like GDP, growth rates, inflation and interest rates.

Wimborne points to Brazil’s interest rate hike from 2 per cent to 15 per cent over the past five years as an example of a factor that affects the perceived valuation of a business.

“We think those macroeconomic factors are very important drivers of what happens to company valuations in emerging markets,” he says.

“So for us, starting with the country drivers is of critical importance, and making sure we’re focused in on the right countries that have supportive macroeconomic conditions. Then we find the companies within them that are benefiting from those trends.”

About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
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