There’s a lot going on in global markets just now. In this analysis, Chetan Sehgal, Portfolio Manager, Templeton Emerging Markets Investment Trust (TEMIT), tells us why he remains positive that there are considerable opportunities for those investors in emerging markets who know where to look.
If we start with an overview of recent trends we can reflect that emerging market (EM) equities collectively declined in May 2024 and underperformed their developed market counterparts. The inflationary environment in the US saw a turning point with April’s consumer price index increasing less than expected. For the month, the MSCI EM Index-NR returned -1.10%, while the MSCI World Index-NR rose by 2.74%, both in sterling terms. Equities in all major EM regions retreated.
In emerging Asia, Chinese equities overall continued their upward streak. The announcement of several regulatory policies helped to boost the market. Property-related stocks benefitted from a rescue package. This included an easing of mortgage rules and encouraging local governments to buy unsold houses from developers. Semiconductor stocks in China also gained from a new investment fund that was set up to boost the country’s chip industry.
Strong earnings results and confident sales forecast of American semiconductor chip design company Nvidia buoyed semiconductor stocks in South Korea and Taiwan, although company-specific issues dragged South Korea’s leading player lower. South Korea’s government announced a support package for domestic semiconductor firms. Indian equities received some support from expectations of a comfortable election victory by the current ruling party.
Several countries in the Europe, Middle East and Africa (EMEA) region saw diversification away from oil-based economic growth. The United Arab Emirates’ (UAE) economy grew in the fourth quarter of 2023 from a year ago. Non-oil economic growth was a key driver. With similar plans for its economy, Saudi Arabia’s government is preparing to sell some of its shares in its national oil company.
In Latin America, Brazil’s smaller-than-expected interest-rate reduction disappointed. Brazil’s state-run oil firm Petrobras dragged the local equity market lower as well. Changes in its management team and an increase in its capital allocation risk drove its share price lower. While Brazil’s annual inflation rate rose less than expected in the first half of May, Mexico’s headline inflation sped up more than expected.
Looking ahead
As the Organisation for Economic Co-operation and Development has upgraded its global growth forecast from 2.9% to 3.1% for 2024, we believe that the resilient growth and eventual loosening of financial conditions globally should lead to an improvement in macroeconomic conditions for emerging markets. As a start, goods inflation has started declining in most markets, which has led many investors to look beyond current higher interest rates.
Geopolitical tensions continue to remain a risk and impact global supply chains and energy prices. Ongoing conflicts in Ukraine and Gaza continue to affect economic activity. Upcoming US elections results could have material implications for geopolitics, including the relationship between the United States and China.
The Chinese government has followed up with policies to stabilise and promote its economy, which has led to an increase in local confidence in China. However, there is scepticism over the effectiveness of China’s rescue package for its property sector and a continual reduction of Western countries’ dependence on Chinese supply chains from geopolitical tensions. These factors continue to impinge on valuations in the Chinese equity market. Most of our exposure is to internet-related companies in China, specifically the ones that, in our analysis, can continue to generate cash and have good shareholder return policies.
The emergence of artificial intelligence (AI) has been a big catalyst for EMs such as South Korea and Taiwan. Many of the semiconductor and hardware companies catering to the AI industry are in EMs. These economies are the big suppliers of chips and tools that will help enable the AI revolution. We also see technology playing a critical role in another secular trend—the pursuit of net-zero carbon emissions in EMs. Advanced semiconductors hold the key for building better-performing hardware that consumes less power. Among other high-growth segments, electric vehicles have seen a material slowdown in growth expectations. The segment has seen a derating in share prices; we have lowered our exposure.
EMs have evolved—embracing innovation, technology and diversification. As pivotal players in the global trade map, we believe their adaptability and growth trajectory position them as key drivers of the world economy, providing them compelling investment opportunities for investors globally.
