Emerging Markets Insights

A Tale of Two Halves in Emerging Markets in August

Franklin Templeton Emerging Markets Equity

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Three Things We're Thinking About Today

  1. Our view is that the increased regulatory scrutiny in China’s internet sector is focused on creating conditions conducive to long-term sustainable growth for all stakeholders—rather than curbing the development of the technology sector. Chinese technology companies contribute to a significant proportion of economic growth and employment in the economy and play a pivotal role in the Chinese government’s technological goals. Therefore, our view is given the government’s plan to use innovation as a driver of gross domestic product (GDP) growth and productivity gains in the long term, the intention is not to curtail innovation and innovative businesses. Rather, the objective is to avoid monopolistic positions that could have negative effects without the appropriate controls. China’s ambitious roadmap includes tapping into a formidable resource not every other country has—a vast population that can drive demand, and a history filled with rapid adoption of modern technology.

  2. We believe that economic growth drivers in China will largely stem from domestic consumption, innovation and technology—consistent with areas highlighted in the previous Five-Year Plan—and a commitment to the environment, with targets for the country to reach peak carbon emissions by 2030 and achieve carbon neutrality by 2060. The plan’s manufacturing upgrade will also prompt companies to create supply chain self-sufficiency as China moves up the value chain, as a result of accelerated adoption of local technology and digitalization. Hence, we believe that there will be beneficiaries of China’s effort to re-balance wealth distribution as the other aspects of the common dual circulation policy that focuses on carbon neutrality, technology localization and consumer premiumization (made possible with rising incomes) could create attractive investment opportunities.

  3. Inflation has elevated around the world as supply bottlenecks, shipping disruptions and recovering demand have been driving up prices. Higher commodity prices and base effects have also been lifting headline inflation. While we expect this situation to be transitory and look for inflation to moderate in 2022, heightened prices and post lockdown booms have forced some emerging market (EM) central banks to act. South Korea, Brazil, Mexico, Russia and parts of Central and Eastern Europe have already started tightening, but others across the world are willing to wait. We believe that investors should not be too worried about the upward move in inflation across much of EMs, but rather view it as an expected part of economic normalization post the COVID-19 crisis.

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WHAT ARE THE RISKS?

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.