Emerging markets are regaining attention as global conditions begin to shift, with expectations of lower US interest rates and improving domestic fundamentals supporting the outlook. While uncertainty remains elevated, opportunities are emerging across select regions and sectors, particularly as structural themes such as AI and global trade dynamics continue to evolve.
Below, Chetan Sehgal, Lead Portfolio Manager of Templeton Emerging Markets Investment Trust (TEMIT), shares his latest views on the outlook for emerging markets.
Amid high uncertainty, in comparison to developed markets, EMs still look relatively attractive and offer exposure to both domestic and international growth opportunities.
Several macroeconomic factors are contributing to this outlook. Expectations for further US interest rate cuts are supportive, as EM assets historically benefit from easier global financial conditions and a potential dollar softness. Earnings dynamics are also improving in parts of EMs. Domestic fundamentals have strengthened in recent years, providing economies with room to ease policy to support consumption.
Structural themes underpin the above, adding another dimension to the optimism we carry. Technology-heavy equity markets in Asia are benefitting from the global AI and semiconductor investment cycle, which has strengthened export demand and corporate profitability.
AI continues to experience strong structural growth, with companies across a wide range of sectors leveraging AI to improve efficiency, enhance productivity and strengthen competitive positioning. Chinese industrial companies are benefitting from robust export demand to markets outside the United States, providing an offset to softer domestic dynamics.
In our view, the drivers of the future performance of EM equities are likely to remain in place. However, instead of broad-based returns, performance is likely to appear in pockets of opportunities. We therefore favour an active, bottom-up investment approach, emphasising quality companies with strong balance sheets and competitive advantages.
