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UK PROFESSIONAL ADVISERS – IMPORTANT LEGAL INFORMATION
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The prices of shares and units and income there from can go down as well as up, and you may not get back the full amount invested. Past performance not an indicator, nor a guarantee of future performance. Currency fluctuations may affect the value of overseas investments. When investing in a fund denominated in a foreign currency, performance may also be affected by currency fluctuations. Where a fund invests in derivative instruments, this entails specific risks that may increase the risk profile of the fund and are more fully described in the TEMIT audited annual report. Where a fund invests in a specific sector or geographical area, the returns may be more volatile than a more diversified fund. Emerging Markets can be more risky than developed markets.
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This website is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of any of Franklin Templeton Investments’ fund ranges. Nothing in this website should be construed as investment advice. Franklin Templeton Investments has exercised professional care and diligence in the collection of information in this website. However, data from third party sources may have been used in its preparation and Franklin Templeton Investments has not independently verified, validated or audited such data. Opinions expressed are the author’s at the publication date and they are subject to change without prior notice. Given the rapidly changing market environment, Franklin Templeton Investments disclaim responsibility for updating this material. Any research and analysis contained in this website has been procured by Franklin Templeton Investments for its own purposes and is provided to you only incidentally. Franklin Templeton Investments shall not be liable to any user of this website or to any other person or entity for the inaccuracy of information or any errors or omissions in its contents, regardless of the cause of such inaccuracy, error or omission.
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You will use your best efforts to take all appropriate action and otherwise satisfy your obligations under this Agreement and to prevent the misuse of the Holdings Information. You will immediately notify FTI if you learn of any use of the Holdings Information by any employees, agents or clients that would otherwise violate this Agreement. You acknowledge that damages alone would not be an adequate remedy for any breach of the provisions of this Agreement and, accordingly, without prejudice to any and all other rights or remedies, you acknowledge that FTI or any Fund or F-T Fund to which the Holdings Information pertains shall be entitled to the remedies of injunction, specific performance and other equitable relief for any threatened or actual breach of the provisions of this Agreement.
You shall not be bound by the provisions of confidentiality contained in this Agreement if such Holdings Information 1) is or becomes publicly known through no act or omission of the Financial Institution, its employees, agents or subcontractors; 2) is lawfully disclosed to you by a third party without restriction and without any obligation of confidentiality; 3) is required to be disclosed by any Governmental body, regulatory body (including without limitation any relevant securities exchange) or court of competent jurisdiction or otherwise pursuant to any statutory or regulatory obligation.
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Institutional Investor Terms & Conditions
UK INSTITUTIONAL INVESTORS - IMPORTANT LEGAL INFORMATION
THIS AREA OF THE WEBSITE IS INTENDED FOR UK INSTITUTIONAL INVESTORS. IT IS NOT INTENDED FOR USE BY MEMBERS OF THE GENERAL PUBLIC. FOR INFORMATION ON PRODUCTS AVAILABLE TO MEMBERS OF THE GENERAL PUBLIC, PLEASE REFER TO THE RETAIL INVESTORS SECTION OF THIS WEBSITE.
I CONFIRM THAT I AM A PROFESSIONAL INVESTOR, HAVE READ THE IMPORTANT INFORMATION AND WISH TO PROCEED
IMPORTANT INFORMATION
You must read this before proceeding, as it explains both the legal and regulatory restrictions which apply to the information contained and investment products referred to within this Website.
This Website is directed only at individuals resident within the United Kingdom and the information provided is not for distribution outside the United Kingdom. None of the information, whether in part or full, should be copied, reproduced or redistributed in any form nor should it be regarded as an offer or a solicitation of an offer for investment in countries outside the United Kingdom. No shares or units in these products or funds may be offered or sold to US Persons (as more fully defined in the latest Fund prospectus) or in any other country, state or jurisdiction where it would be unlawful to offer, solicit an offer for or sell such shares or units.
The information on this Website is issued and approved by Franklin Templeton Investment Management Limited and does not, in any way, constitute investment advice. Franklin Templeton Investment Management Limited is authorised and regulated by the Financial Conduct Authority (FCA).
This site uses cookies to improve your online experience. Sites like ours store small text files on your computer when you visit. We use this information to monitor traffic and look for ways to improve the services we offer at www.temit.co.uk. The cookies we use don't include any information about your personal identity or your accounts. Your browser must accept at least a session cookie to use all the features on this site. For instructions on disabling these files, please visit our cookie policy. By closing this message, you consent to our use of cookies on this site.
The prices of shares and units and income there from can go down as well as up, and you may not get back the full amount invested. Past performance not an indicator, nor a guarantee of future performance. Currency fluctuations may affect the value of overseas investments. When investing in a fund denominated in a foreign currency, performance may also be affected by currency fluctuations. Where a fund invests in derivative instruments, this entails specific risks that may increase the risk profile of the fund and are more fully described in the TEMIT audited annual report. Where a fund invests in a specific sector or geographical area, the returns may be more volatile than a more diversified fund. Emerging Markets can be more risky than developed markets. Subscriptions for shares or units in any Franklin Templeton Investments product or fund can be made only on the basis of the latest available audited annual report and the latest semi-annual report if published thereafter (or other offering document) for that product or fund which more fully describes the investment risks.
This website is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of any of Franklin Templeton Investments’ fund ranges. Nothing in this website should be construed as investment advice. Franklin Templeton Investments has exercised professional care and diligence in the collection of information in this website. However, data from third party sources may have been used in its preparation and Franklin Templeton Investments has not independently verified, validated or audited such data. Opinions expressed are the author’s at the publication date and they are subject to change without prior notice. Given the rapidly changing market environment, Franklin Templeton Investments disclaim responsibility for updating this material. Any research and analysis contained in this website has been procured by Franklin Templeton Investments for its own purposes and is provided to you only incidentally. Franklin Templeton Investments shall not be liable to any user of this website or to any other person or entity for the inaccuracy of information or any errors or omissions in its contents, regardless of the cause of such inaccuracy, error or omission.
Portfolio Holdings for Non-US Funds/Non-US Advisers - From time to time Franklin Templeton Resources Inc (FRI) and its subsidiaries, partnerships, joint ventures and related and affiliated business entities (“FTI”) may provide you with a partial listing of portfolio securities including but not limited to top contributors and detractors to portfolio performance owned by one or more non-US domiciled funds that are registered or passported with local regulatory authorities and are sponsored by FTI (each a “Fund” and together “Funds”) and any such additional information relating to the Fund(s) that may not otherwise be publicly disseminated. Such listing of portfolio securities and any other non-public information is subject to the following terms and conditions below and is herein referred to as “Holdings Information”.
You are an authorised representative of a bank, broker-dealer, insurance company, registered investment adviser or other professional client (together, “Financial Institutions”) engaged in business activities outside the United States (a “Non-US Adviser”) and the Financial Institution has authorised you to access and use the Holdings Information. You are deemed to have read, understood and accepted the terms and conditions and you further agree that all provisions of this Agreement are equally binding upon you and the Financial Institution. IF YOU ARE NOT AUTHORISED TO ACCESS HOLDINGS INFORMATION OR YOU DO NOT WANT TO BE BOUND BY THE TERMS OF THIS AGREEMENT YOU SHOULD NOT ACCEPT HOLDINGS INFORMATION.
You undertake to keep the Holdings Information strictly confidential, regardless of the Holdings Information form or whether the Holdings Information is marked or identified as proprietary or confidential. You also agree not to disclose or disseminate the Holdings Information to any third party and to treat the Holdings Information as nonpublic and proprietary, and you further acknowledge that the Holdings Information constitutes a valuable asset of FTI, the Funds and Fund shareholders. You recognise that adverse consequences may result for Fund shareholders if the Holdings Information is used for inappropriate trading purposes. In addition, FTI may reasonably request that you make available to FTI all research produced on the Funds.
You will not:
Purchase or sell any portfolio securities listed in the Holdings Information on the basis of any information contained in Holdings Information;
Trade against the Funds or knowingly engage in any trading practices that are adverse to FTI or the Funds on the basis of the Holdings Information; and
Trade in shares of any US registered investment company sponsored by FTI that is substantially similar to the Fund.
You will use your best efforts to take all appropriate action and otherwise satisfy your obligations under this Agreement and to prevent the misuse of the Holdings Information. You will immediately notify FTI if you learn of any use of the Holdings Information by any employees, agents or clients that would otherwise violate this Agreement. You acknowledge that damages alone would not be an adequate remedy for any breach of the provisions of this Agreement and, accordingly, without prejudice to any and all other rights or remedies, you acknowledge that FTI or any Fund or F-T Fund to which the Holdings Information pertains shall be entitled to the remedies of injunction, specific performance and other equitable relief for any threatened or actual breach of the provisions of this Agreement.
You shall not be bound by the provisions of confidentiality contained in this Agreement if such Holdings Information 1) is or becomes publicly known through no act or omission of the Financial Institution, its employees, agents or subcontractors; 2) is lawfully disclosed to you by a third party without restriction and without any obligation of confidentiality; 3) is required to be disclosed by any Governmental body, regulatory body (including without limitation any relevant securities exchange) or court of competent jurisdiction or otherwise pursuant to any statutory or regulatory obligation.
The Agreement shall remain in effect for so long as you access the Holdings Information from FTI. FT may terminate this Agreement immediately if this Agreement conflicts with any laws, rules or relevant regulatory interpretations. Upon termination, you shall continue to take reasonable measures to prevent the disclosure or dissemination of the Holdings Information. You acknowledge that the Holdings Information may be utilised for damaging purposes, such as duplicating FTI’s proprietary investment and trading strategies, techniques and methodologies. As a result, your nondisclosure obligations and the prohibition on your dissemination of the Holdings Information to any third party shall survive this Agreement’s termination. To the extent of any conflict between this Agreement and any other agreement between you and FTI, then this Agreement shall be deemed to constitute an amendment to such other agreement.
This Agreement may not be assigned by you, and you may not delegate its duties hereunder, without the prior written consent of FTI. All of the terms and provisions contained herein shall inure to the benefit of and shall be binding upon the parties hereto and their respective heirs, successors and assigns. Nothing contained in this Agreement shall be construed as creating any obligation or any expectation on the part of either party to enter into a business relationship with the other party, or an obligation to refrain from entering into a business relationship with any third party.
Nothing contained in this Agreement shall be construed as creating a joint venture, partnership or employment relationship between the parties, it being understood that the parties are independent contractors vis-à-vis one another. Except as specified herein, no party shall have the right, power or implied authority to create any obligation or duty, express or implied, on behalf of any other party hereto.
YOU SHALL INDEMNIFY AND HOLD ANY AND ALL FTI PERSONS HARMLESS AGAINST ANY AND ALL COSTS, EXPENSES, LOSSES, LIABILITIES, OBLIGATIONS, DAMAGES, PENALTIES TO WHICH ANY SUCH PARTY MAY BECOME SUBJECT INCLUDING REASONABLE LEGAL AND OTHER SUCH PROFESSIONAL FEES INCURRED IN INVESTIGATING AND DEFENDING OR APPEALING PENDING OR THREATENED CLAIMS, ACTIONS, SUITS, PROCEEDINGS, ARBITRATIONS, AMOUNTS PAID IN SETTLEMENT THEREOF (COLLECTIVELY “EXPENSES”) DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO ANY BREACH OF THIS AGREEMENT SAVE WHERE SUCH EXPENSES RESULTED DIRECTLY FROM OUR GROSS NEGLIGENCE, FRAUD OR WILFUL MISCONDUCT.
The Agreement: (i) may be modified or supplemented by FTI at anytime upon reasonable notice to You; (ii) shall be binding upon and inure to the benefit of the successors and assigns of FTI and You; and (iii) shall be governed and construed in accordance with the laws of the United Kingdom.
Please read the Terms of Use Agreement and indicate your acceptance.
This website uses cookies. You can read about the cookies that we use here. By continuing to browse and not disabling these cookies you consent to our use of cookies.
Emerging Markets Outpace Developed Markets in the Final Quarter of 2018Jan 14, 2019
Numerous uncertainties weighed on investor sentiment in 2018 and led to a down year for emerging markets overall, although the fourth quarter saw some outperformance versus developed markets. Manraj Sekhon, CIO of Franklin Templeton Emerging Markets Equity, and Chetan Sehgal, senior managing director and director of portfolio management, present the team’s overview of the emerging-markets universe in the fourth quarter of 2018, along with their current outlook.
Manraj Sekhon, CFA Chief Investment Officer, Franklin Templeton Emerging Markets Equity
Executive Vice President, Director of Global Emerging Templeton Emerging Markets Group
Three Things We’re Thinking about Today
The US Federal Reserve (Fed) raised its key interest rate by 25 basis points in December, its fourth increase in 2018, and in line with market expectations. While the Fed lowered its US gross domestic product (GDP) growth and inflation forecasts slightly, it continued to see relatively strong growth in the US economy. US interest-rate hike projections for 2019 and the longer run were also lowered, with two interest-rate hikes expected in 2019, instead of three. While rising rates—by design—apply pressure to growth and inflation expectations, this is not solely restricted to emerging markets (EMs), and most debt ratios are considerably higher in the developed world. EMs in aggregate have shifted to current account surpluses, floating exchange rates and a reduced reliance on US-dollar debt funding. However, those emerging economies (and companies) pursuing less prudent policies have been punished heavily by financial markets. Investors appear to be increasingly discerning between winners and losers, which presents opportunities for active management.
US dollar strength has focused attention on weaker commodity prices and dented investor enthusiasm for emerging markets in recent months—stoking fears that the current climate could lead to a repeat of the 1997-1998 Asian Financial Crisis (AFC). However, we believe these concerns are largely overdone as the last two decades of mass financial reforms have transformed emerging Asia’s financial markets. Twenty years on from the AFC, we regard the economic landscape in many EMs as fundamentally stronger than it was back then. Our experience suggests investors should focus less on what’s going on in the United States, and more on the developments on the ground in the countries themselves. In many cases, EMs have drawn lessons from past crises to strengthen policies and governance. In addition, many EM economies are less commodity-driven then they were decades ago. Therefore, the whims of commodity prices have less influence. Changes in US policy could, of course, still cause pain in EM countries with high external debt. But we have noticed a general shift. Asian monetary policy is no longer as highly correlated with US interest rates and is more dependent on local growth and inflation conditions.
The recent decline in oil prices has helped ease pressure on the Indian rupee, current account deficit and inflation. The Indian economy also continues to perform well; government capital expenditure (capex) through infrastructure spending has progressed well, corporate capex involving capacity expansion is gradually unfolding, and we believe that household capex is also improving. Consumption remains robust as well. India went through a challenging environment recently where shadow banks, typically referred to as non-banking financial companies (NBFCs) in India, suffered liquidity issues, raising concerns of systemic risk and liquidity across the entire financial system. Liquidity has since been normalizing and credit flows returning. While upcoming elections could impact sentiment in the interim, we do not foresee a significant impact on the domestic economy. As such, our assessment of the macro picture and corporate fundamentals (with continued economic recovery and corporate earnings growth acceleration) supports our favorable long-term conviction for India’s market.
Outlook
Trade tensions have been a primary contributor to weakness in EM equities, and while exports remain a key engine of growth for EMs, they are increasingly shipped to other emerging economies; the relative importance of developed markets has declined. Similarly, the roles of consumption and technology in generating economic growth have become more prominent; EMs have become more domestically orientated. While tariffs undoubtedly come at a challenging time for China as it seeks to deleverage its economy, the impact will also be felt globally.
Despite slowing global growth, EMs are still widely expected to achieve faster economic growth than developed markets (DMs) in 2019 and for the foreseeable future. The International Monetary Fund (IMF) forecasts EMs to grow 4.7% in 2019, more than double the 2.1% estimate for DMs1. EM currencies are relatively cheap after declining in 2018; returning to 2001-2002 levels. We expect to see a recovery in 2019.
EM valuations have become increasingly attractive due to weakened confidence (and performance), yet cash flows and earnings generally remain resilient. EM earnings growth is expected to exceed that of the US and DMs, resuming the trend witnessed in 2017. These conditions, when paired with improving corporate governance that includes dividend payouts and buybacks, present an increasingly attractive long-term buying opportunity for us and should contribute to renewed optimism in the EM asset class.
Emerging Markets Key Trends and Developments
EM equities fell over the fourth quarter, though they fared better than their DM counterparts. Concerns about global economic growth, US interest rate hikes and US-China trade relations stoked market volatility during the period, as they did in much of 2018. The year proved challenging for global markets as a whole, with EM equities losing more ground than DM stocks. The MSCI Emerging Markets Index fell 7.4% over the quarter, compared with a 13.3% decline in the MSCI World Index, both in US dollars.
The Most Important Moves in Emerging Markets This Quarter
Asian equities pulled back in the fourth quarter, with Pakistan, Taiwan and South Korea leading regional losses. Pakistan’s financial health weakened, while the government sought a bailout from the IMF. Technology-heavy indexes in Taiwan and South Korea were hobbled by weakness in technology stocks. Conversely, markets in Indonesia, the Philippines and India gained, aided by local currency strength. The Indonesian rupiah and Philippine peso rose on central bank action to shore up the currencies against the US dollar. The Indian rupee also advanced as lower oil prices eased worries about the oil-importing nation’s trade deficit.
Latin America was the only EM region to end the quarter with a minor gain, solely because of the strong performance of the Brazilian market in October. Equity prices in Brazil rallied on the victory of a more market-friendly candidate in presidential elections as well as appreciation in the Brazilian real. At the other end of the spectrum, Colombia and Mexico recorded double-digit declines. Increased political and economic policy uncertainty and higher interest rates, partly driven by higher inflationary pressures, impacted investor sentiment in Mexico. A decline in oil prices and depreciation in the Colombian peso weighed on the Colombian market.
Emerging European markets lost ground, with Greece, Russia and the Czech Republic especially weak. Hungary and Turkey, however, held on to earlier gains to end the quarter with positive returns. Lower oil prices and increased geopolitical risk weighed on share prices in Russia. The Turkish market benefited from a double-digit gain in November, following significant weakness earlier in the year, as political tensions eased, and the Turkish lira appreciated. The South African market declined but fared relatively better than its EM peers. The South African economy returned to growth in the third quarter of 2018, following two consecutive quarters of contraction.
Frontier markets corrected over the final quarter of the year but performed better than their global counterparts. Lithuania, Romania and Tunisia were among the weakest markets. Vietnam and Kenya also underperformed. Global trade concerns and weak market sentiment weighed on equity prices in Vietnam despite positive earnings results and robust GDP growth. Sri Lanka, Lebanon and Estonia, however, bucked the trend, ending the three-month period with gains. Investors in Sri Lanka remained positive despite continuing political instability and weakness in the Sri Lankan rupee.
China
The negative outlook is mainly driven by the uncertainties surrounding the US-China trade dispute. As the US cycle matures and global growth momentum slows, China’s GDP growth is expected to ease to 6.0-6.1% in 2019. While the trade dispute and Huawei incident could lead to weaker exports, government stimulus and tax cuts are expected to support domestic consumption and fixed asset investment.
India
Long-term fundamentals include under-penetration, formalization of economy and a stable government remain intact. However, the improving current account deficit and easing inflationary pressure along with a strong possibility of an improvement in corporate earnings are offset by higher-than-average valuations and incremental political uncertainty.
Indonesia
Economic growth remains steady. However, politics will likely heat up ahead of the legislative and presidential elections in April 2019.
South Korea
Macro indicators remain sound. However, concerns about government regulations are growing, while the geopolitical situation warrants close attention.
Pakistan
Uncertainty remains with concerns on a political reshuffle and high current-account deficit.
Taiwan
The major overhang is the US-China trade dispute. Many Taiwanese companies have production plants in China and could be impacted if the situation worsens. Weaker-than-expected demand for information technology-related products is also worrying. Inflation has been manageable, limiting pressure on interest rates.
Thailand
Economic stability remains strong, but the growth outlook is moderate. The upcoming general election should support near-term sentiment, but outlook could be challenging post-election.
Vietnam
GDP remains above 6%, underpinned by resilient domestic demand and strong export-oriented manufacturing. US-China trade tariff issue is an uncertain risk.
Czech Republic
Relatively safe EM, with an open economy and current account surplus. Do not expect any significant issues unless there is a significant global slowdown.
Hungary
The economy is doing well but structural problems seem to be accumulating. However, the near-term outlook should not be impacted.
Russia
In a stable oil price/ruble environment, domestic names should benefit from earnings revisions and increased demand. The political situation should remain stable with the next presidential election scheduled for 2024. However, macro risks remain high due to volatile commodity prices and the possibility of additional US/EU sanctions.
Turkey
Weak demand and high cost of funding has resulted in a challenging macroeconomic environment for companies. Non-performing loans are expected to rise in the short term. A recovery may start after the March 2019 elections.
Argentina
The US$57 billion IMF Stand-By Arrangement should meet the government’s financing needs until end-2019 but failed to lower sovereign spreads to a level that would allow Argentina to return to the international financial markets. Meeting the government’s 2020-2024 financial needs, however, look challenging in view of the US$35 billion average annual requirement. The market believes that the victory of the opposition in 2019’s presidential election could trigger a debt re-negotiation.
Brazil
The new government’s emphasis on implementing ambitious economic reforms could provide a basis for higher economic growth and a better business environment for companies.
Mexico
We expect volatility in financial markets to continue as uncertainty about how the new Mexican administration will run the country continues.
Peru
President Vizcarra’s approval ratings have continued to consolidate at higher levels, while Fujimorism seems to have lost appeal to the masses. We expect political noise but believe that it should not cause Peru to deviate from its sustained long-term growth trend.
Kuwait
FTSE upgrade and potential MSCI upgrade to EM status could be positive catalysts for the market. Kuwait’s fiscal position appears stronger than its regional peers and hence more defensive. A persistent risk is political deadlock, which often leads to slower fiscal reforms and investments.
Saudi Arabia
FTSE and MSCI EM upgrades could be strong catalysts for the market. The country continues to see stable economic growth, while the National Transformation plan and Vision 2030 is to be redrafted to reflect more realistic targets.
United Arab Emirates
Within the region, the UAE is least dependent on oil revenues. Fiscal reforms such as the value-added tax implementation have been successful. The strong property sector, however, needs to be monitored closely.
Egypt
Egypt has made a committed step toward economic reforms. It is witnessing receding inflation and a strengthening currency.
Kenya
GDP growth could pick up after stalling last year, but credit remains constrained and the IMF facility review is at risk.
Nigeria
The market is improving from a macro perspective with higher oil production, higher oil price, steadying inflation and foreign exchange liquidity. However, some investors do have concerns regarding investment into Nigeria given the substantial claims against telecom company, MTN.
South Africa
The outlook is less positive than 3-6 months ago, weighed by a slow recovery and weaker global backdrop and sentiment. Domestically, though, the country should be past the lowest point.
Qatar
Risks include slowing economic growth, political conflict and deadlock, and continued weak investor appetite.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
The comments, opinions and analyses expressed herein are solely the views of the author(s), are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
Important Legal Information
All investments involve risks, including the possible loss of principal. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.
________________________
1. Source: International Monetary Fund, World Economic Outlook Database, October 2018.
Numerous uncertainties weighed on investor sentiment in 2018 and led to a down year for emerging markets overall, although the fourth quarter saw some outperformance versus developed markets. Manraj Sekhon, CIO of Franklin Templeton Emerging Markets Equity, and Chetan Sehgal, senior managing director and director of portfolio management, present the team’s overview of the emerging-markets universe in the fourth quarter of 2018, along with their current outlook.
Chief Investment Officer,
Franklin Templeton Emerging Markets Equity
Executive Vice President, Director of Global Emerging
Templeton Emerging Markets Group
Three Things We’re Thinking about Today
Outlook
Trade tensions have been a primary contributor to weakness in EM equities, and while exports remain a key engine of growth for EMs, they are increasingly shipped to other emerging economies; the relative importance of developed markets has declined. Similarly, the roles of consumption and technology in generating economic growth have become more prominent; EMs have become more domestically orientated. While tariffs undoubtedly come at a challenging time for China as it seeks to deleverage its economy, the impact will also be felt globally.
Despite slowing global growth, EMs are still widely expected to achieve faster economic growth than developed markets (DMs) in 2019 and for the foreseeable future. The International Monetary Fund (IMF) forecasts EMs to grow 4.7% in 2019, more than double the 2.1% estimate for DMs1. EM currencies are relatively cheap after declining in 2018; returning to 2001-2002 levels. We expect to see a recovery in 2019.
EM valuations have become increasingly attractive due to weakened confidence (and performance), yet cash flows and earnings generally remain resilient. EM earnings growth is expected to exceed that of the US and DMs, resuming the trend witnessed in 2017. These conditions, when paired with improving corporate governance that includes dividend payouts and buybacks, present an increasingly attractive long-term buying opportunity for us and should contribute to renewed optimism in the EM asset class.
Emerging Markets Key Trends and Developments
EM equities fell over the fourth quarter, though they fared better than their DM counterparts. Concerns about global economic growth, US interest rate hikes and US-China trade relations stoked market volatility during the period, as they did in much of 2018. The year proved challenging for global markets as a whole, with EM equities losing more ground than DM stocks. The MSCI Emerging Markets Index fell 7.4% over the quarter, compared with a 13.3% decline in the MSCI World Index, both in US dollars.
The Most Important Moves in Emerging Markets This Quarter
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The comments, opinions and analyses expressed herein are solely the views of the author(s), are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
Important Legal Information
All investments involve risks, including the possible loss of principal. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.
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1. Source: International Monetary Fund, World Economic Outlook Database, October 2018.