Our focus when we invest in emerging markets at VanEck is really to find structural growth and focus on finding companies and countries that benefit from that growth. Historically, that meant that we've shied away from cyclical sectors, and that included most of the commodity names. And right now, I think there is reason to take a step back and revisit some of that hesitance for certain commodities.

Why Copper & Aluminum Now

I do think there are now specific commodity groups where you can make a very strong structural growth drivers. And that would include copper and aluminum. If you think about what's going on now in terms of manufacturing, onshoring, as well as electrification and AI, all of these really require certain metals like copper and aluminum to be able to actually execute on that grand plan of data center build-out and upgrading the grid to be able to handle all the AI developments that are coming. And so we have really started to take a different view on these commodities, particularly related to the electrification and AI trade as a second derivative.

And then one more commodity that's a bit different, that we've also now started to engage more with is gold. When you think about our view longer term, and that aligns with the VanEck 10-year view as well, with the US rising deficits and also with emerging markets trading more among themselves and increasingly diversifying gradually from the US dollar, that means over time there is a case for seeking alternatives to the USD, and gold is a natural extension of that. And therefore, we have also started picking up gold companies and find a lot of value in those as well.

"As EM nations diversify from the USD, gold is a natural alternative."

So Latin America actually is becoming more and more interesting as a destination of capital in a world where resource regionalization is becoming more critical after multiple episodes of geopolitical tests that we've seen over the past few years. And then also resilience becomes a central focal point for countries.

Latin America's Resource Advantage

Latin America is a region that's blessed with a lot of natural resources, including some of the critical metals like copper, and also you find gold in certain parts of Latin America, as well as even agriculture across parts of Latin America, which I consider a resource that's important as well. And it's very well aligned with the West. We see Latin America overall stacking up well in this environment.

Now, the other interesting thing about Latin America is we started seeing political change starting from Argentina a few years ago and then going to Peru, Colombia, and more recently some encouraging signs in Brazil from the first round of elections that would yield a more pro markets government. And that also means better policies on the fiscal side and on the reform for mining side. And that makes us very excited about Latin America.

And then the last thing about Latin America is also if you think about a world where there's so much concentration in AI investing, this is a good region to diversify and balance out that concentration risk with some region that has less to do with that directly.

"Latin America is a natural diversifier away from AI concentration risk."

The Investment Case for Brazil

It was very exciting to be in Brazil just one week before the first round of elections and meeting with local investors, company management teams, different policymakers. And at the end, in Brazil, interest rates are very high. They need to come down for cost of capital to come down and for investment to start picking up. And we think the main key to be able to reduce that uncertainty and have a cleaner path towards lower rates is the policy on the fiscal side. the central bank in Brazil has been a key anchor to manage currency risk and to also just be a reliable policy maker, but we need the fiscal side to follow. And that's really what it comes down to.

Now, obviously, from that perspective, the election matters because the market is willing to assign higher credibility of a better fiscal consolidation path to a more market-friendly government. And that's the excitement we saw after the first round of election results when the center right started gaining more traction in the results. At the end of the day, for us, what really matters is who puts the better team in place that's going to come up with a better quality and higher credibility fiscal consolidation path. And that opens the door for much lower interest rates. That then encourage investment and also make equity investing much more profitable.

Compelling Brazil Sectors

We think Brazil, like other places in Latin America, has very strong quality managements that have been navigating political uncertainty, currency volatility, different political environments. And so that's something that we have to highlight here. And those teams are able to manage businesses and navigate through different cycles successfully and have come have been compounding earnings in sectors like healthcare, like select financials that maybe are less exposed to a potential asset quality issue with Fortress balance sheets in certain segments like home builders and also mall asset management. And so we do find a lot of interesting companies in Brazil that in many cases are cheaper than their counterparties in other countries. And that's what gets us excited, especially given the country's ingredients of success being energy and resource rich, a large domestic market, and also generally with good relations across the region and with the US. So we are very excited about Brazil, but really need to get more clarity and certainty around the interest rate cycle and the fiscal path, which then could mean we can increase our investments there and size up our positions.

In a world where the focus is really on resilience and access to resources, a region like Latin America, which is rich on both and has good relationships with its different neighbors, and is now shifting by and large to a more market-friendly political environment, we are very excited about it, especially as a diversifier away from the high concentration in AI.

Our team is very active and we love traveling and we love on the ground research, and we publish a lot of those reflections under our Emerging Market Equity Insights at the vaneck.com website, along with also our thoughts on the emerging market asset class on a quarterly basis. So feel free to check that out.