As the geopolitical environment grows increasingly complex – shaped by energy tensions, volatile oil prices, cautious central banks, and concerns over global growth – equity markets demonstrate strong ability to withstand adversity.
Experts from Franklin Templeton have shared their views on the resilience of Emerging Markets and how investors are thinking about positioning as conditions evolve.
Michael Browne, Global Investment Strategist, Franklin Templeton Institute, said:
“At this point in time, we’re a world on edge. We’re still in midst of a Middle East crisis, we’re in a period of shock and markets are adjusting but that’s not unusual. We’ve had four major shocks this decade which include Covid, the Ukraine invasion, Liberation Day and the tariffs from Trump and now the Middle East crisis.
“But these shocks, don’t tend to rattle the markets in the medium to long term. Whilst immediately they are very powerful in markets, we know they can be short lived, and markets can recover reasonably quickly.”
Dino Kronfol, CIO, Global Sukuk and MENA Fixed Income, Franklin Templeton Fixed Income, said:
“The markets have been consistently optimistic on this Middle East conflict or the kinetic action subsiding. And I largely think the market has been correct. The fears of a more significant escalation haven’t materialised. If we look at pricing in the market today, it suggests the probability of that continues to decline.
“However, what the market has been very wrong about is how quickly the Straits would reopen. We’re 11 weeks into this and the Straits are still closed. If we think about other objectives of this conflict which is the regime and nuclear weapons, all those remain outstanding issues. We seem to have more questions than answers at this point but at least we do have a ceasefire and the market is certainly pricing in a more positive outlook.
“If we’re in the same position in 11 weeks’ time, the pressure will continue to accumulate, we will start to see the shortages from the impact of the Straits. I think we’ll continue to see the compound of higher oil prices, higher fertilizer prices, higher food prices and that will transmit into inflation expectations and therefore into rate market. We’ve already shifted quite a bit with the UK and Europe pricing in three hikes, the US has gone from two cuts to maybe half or one a year from now.
“So, the momentum has shifted and we’ve priced in an inflationary impulse. But if we’re in the same position in 10 weeks’ time, that inflationary impulse becomes something much more pronounced and it will have an impact on growth as well. So, there could still be, significant economic and inflationary consequences to what we’re witnessing today.
“I continue to be worried about developments, and the fact the Straits remain closed. These negotiations are not going too well. The two parties that started this conflict, Israel and the US, we have to wait and see how they react to the lack of consensus or the lack of popularity of this ill-conceived conflict.”
Oliver Wallin, Solutions Portfolio Manager, Franklin Templeton Investment Solutions, said:
“As an asset allocator, we are showing the more optimistic view on equities and we’re looking at events, and we expect markets to be able to look through any short-term setbacks that we see or experience on the path to resolution in the Iranian conflict. What sits behind that positive view is strong corporate earnings and that is the underpin that allows us to be more optimistic on equities.
“Emerging markets ex China is our strongest macro region at present, and we’ve been overweight the region since the start of the year but we’re backing it with more conviction. There are several reasons for this, the first is the earnings story which is very strong and that is driven primarily by the AI theme. We can see some big CapEx spend with the US and that is projected further amongst the hyper scalers and the big beneficiaries of this are semiconductor manufacturers, hardware tech and memory chips and this all falls into the favour of Korea and Taiwan regions which are dominant countries within the emerging markets.
“We’re also more positive on energy risk. There is always concern about supply shock, but we think what the markets may not be attuned too is the reserves that a lot of these countries have. For example, Korea has around 200 days’ worth of oil reserves, so that helps to protect it from the supply shock potential.
“Emerging markets have improved over the past decade, they’re much more attractive for outside investors. We have got improved macro environments with more flexible monetary policy and fiscal policy, as well as the improvements on a corporate level such as better corporate behaviours and better governance which will help to attract more money.”
Elias Elias, Client Portfolio Manager, Franklin Templeton, said:
“If you look at the MSCI Emerging Markets index, it’s up 22% year to date, outperforming all other regions. If you look at it since end of February until today, the markets are up 6%, that’s since the war started. We had a sell off in March but then we’ve seen a very strong rebound afterwards. The reason emerging markets are up despite the war, is due to the focus on AI.”
“EM equities are expected to grow earnings over the next three years by an average per year of 28% annually. That’s larger than what the S&P 100 index is expected to grow in the next three years which is around 16%, the developed market index is expected to grow by 14%. The earnings growth story is driving the market”
“Asia is a net importer of energy, so any volatility in oil markets and oil prices will have an impact. However, there are nuances between China and India. China has a lot of mitigating factors in play. If you look at the energy mix of China, 20% of it is reliant on oil, 30% of the energy mix is renewable energy, and that’s expected to be 50% of the mix by the end of the decade.
“China has the second biggest strategic reserves in the world in terms of oil, but China also has the link to Russia, so the availability or the supply of oil, even if the Strait remains as is, the link with Russia allows them to access supply but at higher prices. With China, they don’t pass that cost on to consumers, the government takes the bulk of that higher price pressure to support their consumer. I would say India is a net importer and relies heavily on oil from the Gulf region, so the Strait closure is very painful for them. When you look at India, year to date, it is lagging the rest of the pack.”
“As active stock pickers we’re finding attractive opportunities in the Brazilian market. There are interesting companies with interesting shareholder returns, whether that’s through dividends or buybacks. We also find the quality of the management teams tends to be world class. There’s earnings growth of 19% EPS over the next three years. The long-term prospects from an equity perspective, it looks very attractive.”
Marcus Weyerer, Senior ETF Investment Strategist EMEA, Franklin Templeton, said:
“There is more to emerging markets than just AI. It is also important to bear in mind, that for example, India have the demographics, Korea has a huge defence opportunity, it’s the second largest exporter of arms into the EU. Korea is a major driver of corporate governance reforms which feature high on the government agenda. So, there’s lot of reasons to be positive on emerging markets.
“We have the boom for everything AI, data, storage and memory. Is there a risk that companies overbuild capacity? It’s almost a guarantee that they will over build at some point. But we’re still very much in the build out phase, especially as the new models come, they require exponentially more memory to make them smarter and quicker to handle more data. But once you’ve done the build out, that doesn’t mean you’re done because everyone needs to have the newest chips every time, because if you don’t have them, the new model is going to lag, and your capabilities will lag too.
“We view Latin America (LatAM) as a diversifier. The growth for emerging markets is predominantly in Asia especially Korea and Taiwan and India in the long term. Currently LatAM has less exposure on the tech cycle and its economy is very heavy on domestic consumption.”
