HSBC Remains Cautiously Constructive on Emerging Markets Despite US Election Uncertainty
The resurgence of emerging market (EM) equities in 2024, fueled by a pick-up in consumer demand, improving economic growth, and attractive valuations, has prompted HSBC to maintain its “cautiously constructive” outlook for 2025. Despite acknowledging the potential headwinds of a return to office of U.S. President-elect Donald Trump and the associated risks of tariffs and a strong US dollar, HSBC analysts see a favorable risk-reward profile for EM equities, particularly when compared to developed markets. Their analysis highlights specific opportunities within the EM landscape, focusing on companies that stand to benefit from shifts in global trade and demonstrating resilience in challenging macroeconomic environments. This positive outlook, however, comes with caveats, and specific risks are carefully considered in their assessment.
Key Takeaways: HSBC’s Emerging Market Outlook
- HSBC maintains a “cautiously constructive” stance on emerging markets (EM) for 2025, despite potential risks associated with U.S. policy changes under President Trump’s administration.
- The bank identifies a favorable risk-reward profile for EM equities, citing relatively strong growth dynamics compared to developed markets.
- Specific EM economies, such as India, South Africa, and Brazil, are highlighted as potentially less vulnerable to trade tensions stemming from potential new U.S. tariffs.
- HSBC showcases two compelling investment ideas: XP Inc. (Brazil) and Cemex (Mexico), offering substantial upside potential.
- The report acknowledges the risk of U.S. tariffs and a strong USD as key downside risks to the EM outlook.
Navigating the Landscape: HSBC’s Cautious Optimism
HSBC’s “cautiously constructive” stance reflects a nuanced perspective on the EM landscape. While acknowledging the potential for increased trade tensions under a Trump administration, the analysts emphasize the relatively strong growth trajectory of several emerging markets. The bank believes that the current market sentiment may be overly pessimistic, overlooking the resilience and potential upside of select EM economies and companies. The report specifically points out that if U.S. tariffs are targeted at specific markets rather than universally imposed, some EM economies are poised to benefit from redirected trade flows. This scenario could lead to increased investment and economic activity in nations like India, South Africa, and Brazil, which are seen as less susceptible to widespread trade disruptions.
Understanding the Risks
The analysts explicitly acknowledge the potential downside risks. A continuation of a strong US dollar would negatively impact EM currencies, potentially reducing the attractiveness of EM investments. Furthermore, the implementation of new US tariffs, even if targeted, could negatively impact the global trading system and disproportionately affect some EM economies more than others. The uncertainty surrounding President-elect Trump’s policies presents an undeniable challenge in accurately predicting the future economic environment.
A Shift in Global Dynamics?
HSBC suggests that even potential negative impacts may not be universally felt across all EMs. The report points to a possible “rejigging of trade flows” in which some economies will benefit from shifting trade patterns. This potential shift will likely play a key role in determining which EM economies will benefit most during any period of heightened trade friction. Strategic diversification is clearly recommended for investors in this volatile environment.
HSBC’s Top Picks: High-Potential Investments
The report highlights two specific investment opportunities: XP Inc. and Cemex, demonstrating HSBC’s belief in the potential of selected EM companies.
XP Inc.: Resilience in a Challenging Market
XP Inc., a Brazilian investment platform offering a diverse range of financial products, is presented as a compelling investment despite the challenges of Brazil’s rising interest rate environment. Although shares are down considerably, HSBC analysts emphasize the company’s resilient earnings performance, projecting a 12% compound annual growth rate in EPS between 2022 and 2024. Moreover, they anticipate an attractive dividend yield of approximately 7% in 2023 and 2024. The bank’s target price of $25 represents a substantial 90% upside from its Wednesday closing price. The current dip is viewed as a temporary setback due to the policy interest rate increases. The underlying fundamentals of the company’s business model continue to be viewed as positive.
Cemex: Undervalued Potential in Mexico
HSBC recommends Cemex, a Mexican building materials company, arguing that the market has undervalued its potential. The analysts believe that concerns about demand and policy risks under a Trump administration are overly pessimistic. They highlight that potential import tariffs on competitors could significantly benefit Cemex’s U.S. operations, which they project will account for 35% of the firm’s EBITDA in 2025. The company’s current valuation, at 4.6 times its estimated 2025 EV/EBITDA, represents a considerable discount to its historical average and to its main competitor, Holcim. HSBC’s target price of $9 suggests a 62.2% upside potential from the Wednesday close, further supporting their argument for the company’s undervaluation.
Conclusion: A Balanced Perspective on Emerging Markets
HSBC provides a carefully calculated and balanced assessment of the emerging market outlook for 2025. While acknowledging and weighing the potential risks of a strong US dollar and potential tariffs, particularly under a potential return to a Trump presidency, the bank sees opportunities in strategically selected EM economies and corporations. Their emphasis on companies with resilience, growth potential and relatively strong projected values suggests a preference for targeted investments, focused on quality over broad-based exposure. The two highlighted examples of XP and Cemex demonstrate this selective approach, providing concrete investment ideas potentially offering substantial returns. The report underscores the need for investors to carefully analyze individual markets and companies, understanding that not all EMs are created equal and that risk mitigation will continue to be a key element of any effective investment strategy. This carefully balanced outlook allows investors to potentially capitalize on significant opportunities while remaining mindful of prevailing risks in an uncertain political and economic climate.
