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Emerging Markets Race Ahead in January – SA among best-performing EM currencies

19 February 2019Franklin Templeton

Emerging market equities were off to a strong start overall in 2019, rebounding from a 2018 downturn. Manraj Sekhon, CIO of Franklin Templeton Emerging Markets Equity, and Chetan Sehgal, senior managing director and director of portfolio management, outline what drove market moves in January and why they and the team think confidence in emerging markets should continue to improve.

They also highlighted that the South African rand was among the best-performing EM currencies in January, driving equity gains in US-dollar terms. Higher metal prices drove returns in steel and platinum companies, while weaker-than-expected Christmas sales data and profit warnings from a number of companies weighed on retailers in South Africa.


The Most Important Moves in Emerging Markets This Month


Asian equities rebounded, aided by strong returns in Pakistan, China and South Korea. China’s stock market rallied, thanks to signs of progress in US-China trade talks and fresh policies to counter slower economic growth. South Korea’s benchmark index rose as technology heavyweights surged on the back of improved investor sentiment. Conversely, stocks in India declined. Expectations of increased government spending ahead of a general election this year raised concerns over the country’s fiscal deficit.


In Latin America, Brazil, Colombia and Chile were among the leading performers, ending January with double-digit gains on the back of higher commodity prices and stronger domestic currencies. Positive expectations from the new administration further supported returns in Brazil. Peru and Mexico, while recording positive returns, lagged their regional peers. Concerns that severe fuel shortages, resulting from the government’s efforts to combat fuel and gasoline theft, could impact business operations weighed on sentiment in Mexican equities.


Equity markets in emerging Europe also gained ground with Turkey and Russia leading the way. Higher oil prices and appreciation in the Russian ruble drove returns in that market. The Czech Republic, Hungary and Poland also posted solid gains but lagged their regional counterparts. The South African rand was among the best-performing EM currencies in January, driving equity gains in US-dollar terms. Higher metal prices drove returns in steel and platinum companies, while weaker-than-expected Christmas sales data and profit warnings from a number of companies weighed on retailers in South Africa.


Frontier markets ended the month with positive returns, but fared worse than their global counterparts. Argentina and Kenya led returns, although Vietnam and Kuwait also recorded gains. Romania and Nigeria, however, recorded declines. Appreciation in the Argentine peso and easing inflation supported sentiment in its stock market. Concerns surrounding the upcoming presidential elections in Nigeria weighed on investor confidence, while the government’s decision to implement a levy on the financial sector in Romania worried investors.


Outlook


Investor sentiment in emerging markets continued to improve in January, supported by a dovish Fed and hopes for the United States and China to reach a trade deal by March, when higher US tariffs on Chinese goods are poised to set in.


We believe that confidence in EMs could strengthen further based on several factors: economic growth differentials between EMs and DMs are widening in the former’s favor, EM currencies appear undervalued despite balance of payment surpluses in many markets, ongoing reforms, a robust EM earnings outlook and undemanding valuations.


Emerging markets are currently trading at a significant discount to developed markets (DMs), providing long-term investors with an attractive investment opportunity. As of end-January, the MSCI EM Index traded at a forward price-to-earnings (P/E) ratio of 11.4x and a price-to-book value (P/BV) of 1.6x, while DMs, as represented by the MSCI World Index had a forward P/E of 14.5 and P/BV of 2.3x1.


We are particularly upbeat about growth prospects for the information technology and consumer-related sectors. The growing adoption of technology and growth of digital platforms have helped create new goods and services for consumers across EMs, and at the same time creating growth opportunities for many EM companies and investors. Additionally, with most young people (those under the age of 30) in the world living in EMs, we believe there are tremendous opportunities for businesses that can effectively capture and serve this target market.


Emerging Markets Key Trends and Developments


Global stock markets began 2019 on a strong note, driven by optimism around US-China trade negotiations and hopes for a prolonged pause in US interest rate hikes. EM equities benefited from domestic currency strength and robust portfolio inflows to finish January ahead of their DM counterparts. The MSCI Emerging Markets Index rose 8.8% over the month, compared with a 7.8% return in the MSCI World Index, both in US dollars.

 

 

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