In this analysis for Wealth DFM, Chetan Sehgal, Lead Portfolio Manager at Templeton Emerging Markets Investment Trust (TEMIT), shares some of the reasons why he believes in the long term attractiveness of emerging market equities – especially for those asset managers who can harness the power of local market knowledge
Emerging market equities fell during the month of January and underperformed their developed market counterparts, which advanced. Investor concerns about China’s economy and fading optimism that interest-rate cuts were imminent in the United States dampened market sentiment. For the month, the MSCI EM Index-NR returned -4.54% while the MSCI World Index-NR rose by 1.31%, both in net sterling terms.
Equities in emerging Asia fell. Most emerging market countries registered losses, and markets in China and South Korea led declines. While China’s 2023 economic growth exceeded the country’s official growth target, year-over-year fourth-quarter growth and other data such as retail sales and employment fell short of consensus expectations. However, reports of a market support plan pared some losses towards the end of the period.
In South Korea, the government reduced its economic growth forecast and raised its inflation estimates for 2024. On a positive note, the government also released a slew of measures to stimulate consumption. Meanwhile, South Korea’s exports expanded for a third month in December—shipments of semiconductor products rose, as did their prices. Corporate results were mixed—while AI (artificial intelligence) demand bolstered semiconductor firms, automotive firms faced an uncertain growth outlook. In Taiwan, the Democratic Progressive Party candidate won the island’s presidential election. While Indian equities managed to advance, they generally suffered from a bout of profit-taking after recent gains. Some of India’s financial firms also faced selling pressure on mixed quarterly results and investor concerns about slower growth.
Markets in the emerging Europe, Middle East, and Africa (EMEA) region also registered losses. Tensions in the Middle East escalated, leading to a spike in oil prices. While higher oil prices would typically be conducive to the equity markets in the Middle East, the possibility of later-than-expected interest-rate cuts in the United States pared some gains.
Equities in Latin America declined. Inflation was a key theme—while Brazil and Peru saw an improvement, Mexico’s headline inflation continued its upward trend. The share price of Brazil’s national oil and gas company rose on the back of increased output for 2023 and higher oil prices.
Macroeconomic headlines in recent months have influenced equity-market performance. Earlier optimism has now been replaced by expectations that interest-rate cuts are not imminent in the United States. Some of the emerging market central banks, such as those in Brazil and Chile have already started to cut interest rates.
China underperformed most markets due to investor concerns about slow consumption recovery and geopolitical tensions between China and the West. There have also been woes in China’s property segment, which have weighed on both consumer and investor sentiment. These have overshadowed early signals of China’s recovery. While government policy has become more supportive, we are cognisant that more substantive policies and a rebound in consumer activity are required for a sustained improvement in the performance of Chinese equities. We do still see potential upside in China—particularly the internet segment, which has adjusted to the new operating environment.
The semiconductor industry is expected to recover, due to both volume recovery and pricing improvement. The AI theme has led to some demand uplift, which should benefit companies that address that value chain. We remain overweight on the semiconductor segment, which is a beneficiary of the AI theme.
While the electric vehicle segment has disappointed in the most recent quarter due to a material slowdown in end-market demand growth, our longer-term investment thesis for the electric vehicle industry remains intact.
In a sea of overlooked and under-researched companies, we believe there is no substitute for local market knowledge. Improving corporate governance is also a trend we have noticed in emerging markets. This includes dividend payouts and share buybacks, which we think solidifies the long-term attractiveness of emerging market equities.