With a positive Q3 under their belts, what might be in store for Emerging Market equities in the weeks and months ahead? In his latest analysis for Wealth DFM, Chetan Sehgal (pictured), Portfolio Manager of Templeton Emerging Markets Investment Trust (TEMIT) explains why he’s sticking with the strategy of investing in companies with long term earnings power – and why he’s positive about the team’s ability to identify them.
Overview
Emerging market (EM) equities collectively climbed in the third quarter of 2024 and outperformed their developed market counterparts. The United States (US) Federal Reserve’s long-anticipated interest-rate cut overshadowed earlier fears of a recession in the US. For the quarter, the MSCI EM Index-NR returned 2.46%, while the MSCI World Index-NR, rose by 0.24%, both in UK-sterling terms.
The emerging Asia region’s stocks collectively rose. In China, geopolitical tensions continued to feature heavily. However, there were positive news that helped the Chinese equity market. These included Alibaba’s inclusion on China’s mainland stock indexes and more government support measures. These measures included policy rate cuts from the People’s Bank of China, property-related measures to revive the country’s property market, and measures that encompassed a programme for share buybacks and a swap facility to support the country’s equity market. Indian equities continued to benefit from positive economic data and the reduction in US interest rates, which may lead to foreign inflows into Indian equities. Waning investor optimism about artificial intelligence (AI) impinged on the technology-heavy markets of South Korea and Taiwan. In Southeast Asia, Indonesia’s central bank implemented a surprise interest-rate cut. Thai equities recovered as the political overhang in Thailand has appeared to conclude with the election of a new prime minister.
The emerging Europe, Middle East and Africa region’s equities generally edged higher. Middle Eastern markets benefitted from the beginning of an interest-rate easing cycle in the US—monetary policy in many of the Gulf Cooperation Council countries follows the US central bank given their currencies are pegged to the US dollar. However, geopolitical conflict in the Middle East continued to spiral as Iran-Israel tensions spark. South Africa’s central bank reduced its key interest rate in its latest monetary policy meeting.
Overall, equities in the emerging Latin America region declined. Mexican equities slid after a controversial judicial reform was signed into law. Brazil’s central bank started raising interest rates. This move contrasts against most central banks’ policy decisions. Brazil’s central bank sought to control the country’s inflation environment caused by stronger-than-expected economic activity.
Outlook
On balance, we retain our optimism for the rest of 2024. Tailwinds within EMs remain—interest-rate cuts, strong demand for semiconductors due to AI applications, and what we consider reasonable valuations in most EMs—may negate some key risks such as geopolitical tensions, a meaningful economic slowdown in the US and continued weakness in China’s demand.
Interest-rate cuts, in our view, are catalysts for growth, supporting both consumption and corporate earnings. Brazil’s central bank raised its key interest rate in September, however, we believe that it would eventually follow the global trajectory. While Mexico’s judicial reforms have affected investor sentiment recently, in our view, near-term corporate earnings should remain intact.
Sustained demand growth from AI applications, in our assessment, should be beneficial for South Korea and Taiwan, which are home to several large semiconductor companies. While this is potentially beneficial for the earnings growth of these corporations, we believe that this growth opportunity has not been reflected in valuations of some of the beneficiary companies. Conversely, while India has continued to see good economic growth and remains a bright spot, equity valuations remain an utmost concern for us. While end demand in China could remain weak for a longer period, base effects could potentially prove helpful for earnings growth in 2025. China’s equity market rallied in the last week of the quarter, supported by stimulus measures announced by the government. However, the weaker economic growth outlook in China has led to our selective approach; our key holdings in China are in internet companies that have given us comfort with their cash flows and shareholder returns.
We continue to retain our investment approach and seek opportunities across markets, focusing on companies that, in our analysis, have long-term earnings power. We have built considerable expertise in the EM equity asset class, which we believe gives us the ability to identify investment opportunities before many of our peers.
