Emerging Markets Insights

Strength in Emerging Markets Currencies Boost Returns in May.

Franklin Templeton Emerging Markets Equity

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Three Things We're Thinking About Today

  1. US President Joe Biden’s stimulus plans have reached US$6 trillion, paired with continued vast quantitative easing. The expected resurgence in US growth boosted equity markets and led to a bounce in the US dollar earlier in the year. However, the US dollar has resumed its decline, with EMs also outperforming US equities after a brief period of underperformance. One reason for this could be because higher income, capital gains and corporate taxes are expected to pay for the US$6 trillion funding, and that is not conducive for US corporate earnings or US investors. In contrast, leading EMs have not needed to engage in monetary and fiscal measures of this magnitude and will not have a US$6 trillion tax bill. Thus, the spurt in US growth is expected to be relatively short, petering out by 2022. Emerging markets (EM) are still expected to lead the global economic recovery, with forecasted 2021 GDP growth of 6.7% vs. 6.4% for the United States.1 The EM growth premium widens to 1.5% in 2022.
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  3. Despite its strong market performance in recent years, we believe Russia remains one of the most undervalued markets in Europe as well as the EM universe. Russia has an internally focused economy and policy flexibility (given twin surpluses in its fiscal and current accounts), providing a conducive environment for companies operating domestically. It has little sovereign debt and considerable foreign exchange reserves, allowing it to withstand most financial shocks. In addition to being one of best-positioned oil producers globally, the country’s new economy is also thriving. For example, the country’s leading bank has developed a digital network that incorporates artificial intelligence, big data and robotization. Similarly, Russia’s leading search engine has built an impressive ecosystem. Looking forward, given a gradual recovery in business activity, higher oil prices and stable environment for the Russian ruble, we believe that Russian companies will likely benefit from positive earnings revisions and improved distribution to shareholders as buybacks and dividends also increase.

  4. We believe disruption in innovation and technology continues to support the powerful long-term structural case for investing in EMs. Solar is one opportunity we have identified within this theme of disruption. Advancements in technology and innovation are allowing more sunlight to be converted into energy, and the scope for future growth is considerable. One aspect of solar that has deterred investors in the past is policy risk. This risk is falling, however, as the environment and concerns about global warming are at the top of global leaders’ agendas and new solar projects no longer require government subsidies. For example, in China, President Xi Jinping has set a target for the country to be carbon-neutral by 2060 and for 25% of the energy mix to be from renewables by 2030. China is a world leader in solar production and has the two largest players (the world’s largest solar photovoltaic glass producer as well as the second largest global solar glass producer) in what is a highly concentrated market. Hence, we believe China offers attractive investment exposure to global leaders that are disrupting energy markets.

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ENDNOTES

  1. Source: International Monetary Fund, World Economic Outlook, April 2021. There is no assurance that any estimate, forecast or projection will be realized.


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All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. Smaller and newer companies can be particularly sensitive to changing economic conditions. Their growth prospects are less certain than those of larger, more established companies, and they can be volatile. China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.