A blend of strong growth potential, robust earnings growth and reasonable valuations is expected to drive outperformance of emerging market equities compared to other regions over the coming months. But within emerging markets HSBC Private Bank has singled out Mexico, Turkey and South Korea as the ones to keep a closer eye out for.

Mexico

Growth in Mexico is on par with its long-term average and “benign” inflation, so the central bank is expected to remain “on hold,” Esty Dwek, an investment strategist at HSBC, said in an investment note. Meanwhile, the new government elected at the end of 2012 has brought about “big expectations for reforms” - particularly on the fiscal side - which could bolster equities further.

At the same time, the Mexican market has shown a very high correlation to the US stock market, which the firm believes will “continue to be a supportive factor” whilst its view on the US remains positive.

However, ongoing discussions about fiscal consolidation in the US “may lead to some short-term volatility in the next few months,” the bank said. “But we believe that the growth outlook coupled with accommodative monetary policy will continue to support the US, and with it Mexico.”

According to the The Wealth Report 2012, published by Knight Frank and Citi Private Bank, Latin American high net worth individuals rank Mexico as their third destination of choice for a second home, highlighting how the country's property sector is perceived as attractive both as a home and as an investment.

Click here to view a recent report by PricewaterhouseCoopers looking at the rise of emerging market economies. The organization predicts that the seven biggest such nations (E7) of Brazil, Russia, India, China, Indonesia, Mexico and Turkey will grow at a much faster pace that G7 countries over the next four decades. (The G7 are France, the US, Germany, Italy, Japan, Canada and the UK.)

Turkey: “good news coming from the economy”

Turkish equities ended 2012 as one of the best performing equity markets, helped by a boost in investor sentiment. HSBC believes momentum is still strong: “Indeed, much of last year’s performance was a compensation for 2011 losses, and we still see upside potential from here."

Overall, the growth outlook in Turkey is solid and inflation appears under control, while the central bank appears to have regained credibility, it added. The country has also reduced its current account deficit from about 9 to 6 per cent, resulting in foreign inflows. “This was further supported by the upgrade by Fitch of Turkey’s credit rating to investment grade, boosting sentiment toward the country in general,” the bank said.

Meanwhile, as reported in sister publication WealthBriefing today, new research suggests that the number of high net worth individuals in Turkey is set to rise 60 per cent between now and 2017, reaching over 148,000 by that date (view here).

South Korea

As is the case with Mexico, HSBC says South Korean equities are likely to benefit from improvements in the growth prospects of the US, as South Korean equities tend to follow their US counterparts, although not quite to the same extent as Mexico.

Nonetheless, the bank believes that South Korean equities will “catch up” as investor sentiment improves globally. It also expects the South Korean economy to benefit from improved Chinese growth, which it noted “seems to have bottomed in Q3 2012.” Meanwhile, the technology sector remains an important element of the South Korean market, with “significant upside potential.” Many South Korean companies have strong global brands, HSBC said, which it believes should continue to spur investor interest.

One factor which could, however, impact South Korea's market performance is the ongoing and significant weakness of the Japanese yen. “As JPY weakens, South Korea’s competitive advantage for exports diminishes, which could hurt the market’s returns,” the bank said. “However, we believe that much of the move may have already occurred, at least for the time being, and that a stable JPY is manageable for South Korean exporters.”