By Cathy Hepworth, Head of Emerging Markets Debt at PGIM Fixed Income

My summer greetings come from Cotia, near Sao Paulo. As I listened to Taylor Swift singing on the plane, I thought about how – fitting to Taylor's current Eras Tour – Brazil has been a part of the most important «eras» of my life. I was a student in Brazil, and coincidentally, my husband's sister has lived here for over 30 years.

As a portfolio manager and later as the Head of Emerging Markets, I am responsible for investments in this wonderful country. I feel a deep connection with Brazilians and appreciate their entrepreneurial spirit. And now I am here because we are renovating our vacation home at the Sao Fernando Golf Course.

Cathy Hepworth, PGIM Fixed Income (Image: PGIM)

At the moment, it’s not too hot in Brazil, a pleasant 23 degrees during the day, just right for a combination of Brazil Office (BO) work and house renovations. The house, built in 1993 in the style of a Portuguese villa, is undergoing renovations with the help of local experts, including my nephew, who constructs residential complexes for the middle-income segment. This highlights the significance of the middle class in countries like Brazil.

Five Arguments for Emerging Markets

I am no novice when it comes to house renovations, and the transformation of a house is comparable to the changes Brazil – like many other emerging markets – has undergone in recent years. It requires a keen sense to unlock value, and we observe that emerging markets will gain even more importance.

house remodelling like the change in brazil (Image: CH)

Several structural factors contribute to this: the previously cyclical headwinds are turning into a favorable tailwind, inflationary pressures are easing, and emerging markets are loosening interest rates. For instance, the Banco Central do Brasil has managed to curb inflation without plunging the economy into a recession.

Comeback 2023
Secondly, emerging markets are maturing. They have more sustainable debt structures and growing GDPs. The third factor is strong fundamentals. Although Brazil's public debt relative to GDP is high, there are still strong external buffers. Additionally, in 2023, Brazil made a comeback into the top nine largest economies globally.

Young People in Sao Paulo (Image: Abstral Official, Unsplash)

Brazil's economic growth is primarily due to its highly efficient agricultural industry: last year, the country recorded a remarkable 15.1 percent increase in soybean and corn production. Furthermore, a young and growing population with a strong middle class drives growth (image above).

Strongly Connected with China

Fifthly, emerging markets should benefit from the competition and realignment of great powers. Brazil's economic success will likely require a balancing act in how the country positions itself amid the current competition between the USA and China. At present, this is economically paying off, as Brazil's international trade is strongly connected with China.

In 2023, goods worth 104 billion dollar were shipped to China. As a resource-rich country, Brazil can benefit in many areas relevant to broader global trends, such as the realignment of supply chains and the energy transition.

Stable Growth

While some weaker emerging markets have suffered – including some expected defaults in Argentina, Ecuador, Ghana, Zambia, and Sri Lanka – most emerging markets have proven to be quite resilient. This resilience results from better policy implementation and growth impulses through exports and current account surpluses.

Patos de Minas (Image: Fabio Alves, Unsplash)

Since domestic demand plays a more significant role in growth today than in the past, growth rates have become more stable. We can observe this firsthand with the renovation of our idyll.

As the sun sets (image above) and we relax on the veranda after a long day of work, I hear Taylor Swift again, and her song «Long Live» reminds me of the power of resilience.