In the following exclusive analysis, Chetan Sehgal (pictured), Portfolio Manager of Templeton Emerging Markets Investment Trust (TEMIT), has shared with us his overview of recent activity in Emerging Markets as well as his outlook for the rest of the year.
Overview
Emerging market (EM) equities declined in August 2024. Stocks globally had a weak start in August due to fears of a potential recession in the United States, but encouraging economic data allayed these concerns. For the month, the MSCI EM Index-NR returned -0.69%, while the MSCI World Index-NR rose by 0.32%, both in net sterling terms.
The emerging Asia region’s stocks collectively fell in sterling terms. China outlined plans to boost consumer services amid data that revealed the country’s poorer-than-expected economic performance. Mixed corporate earnings results, along with a stake sale in a Chinese e-commerce company JD.com, pressured China’s consumer-related stocks. Overall, Chinese equities retreated. In India, the Consumer Price Index’s year-over-year change dipped below the Reserve Bank of India’s target for the first time in almost five years. Signals that the US Federal Reserve (Fed) is ready to start easing interest rates were also helpful to India’s equity market. A Fed rate cut could lead to more foreign inflows into Indian equities. However, Indian equities still declined for the period. South Korea’s central bank kept its benchmark interest rate unchanged and lowered its forecasts for both economic growth and inflation for 2024.
However, positive data—monthly revenue and second-quarter earnings results—for a couple of Taiwanese technology companies helped the country’s equity market eke out gains. In Thailand, the election of a new prime minister sent the country’s stocks higher for the month.
The emerging Europe, Middle East and Africa region’s equities generally nudged lower in sterling terms.Heightened geopolitical tensions led to fears of a wider regional conflict, but encouraging US inflation data and expectations of a Fed rate cut helped investor sentiment. The price of South Africa’s most valuable company, internet group Naspers, remained unaffected by the global stock selloff. This helped to support the South African equity market.
Equities in the emerging Latin America (LatAm) region advanced.Brazilian equities were the region’s best performer. Brazil reported a stronger-than-expected economic growth for the second quarter. A solid labour market and services sector overcame the impacts of severe floods. Mexico’s central bank reduced its interest rate. Investors in the country continued to worry about adverse constitutional reforms and regulatory changes.
Outlook
The emergence of AI has buoyed the performance of EM equities year-to-date. For the rest of 2024, we see a potential tailwind for EM equities—the imminent US interest-rate cut. Additional levers of performance for the rest of the year could stem from more policy measures from the Chinese government and additional details on South Korea’s Corporate Value-Up Programme, among others.
We look to stay invested across the key structural trends across EMs. A high-conviction area is the information technology sector, particularly semiconductor stocks that are essential participants in the digitalisation, green transition and AI trends. The latter continues to see strong growth, notwithstanding current concerns about the delays and monetisation of AI investments.
Another sector in which we are overweight is the financials sector. The majority of our holdings in this sector are in some banks across India and LatAm that we regard as some of the best-managed banks globally. We believe these banks will benefit from increasing penetration and credit growth. LatAm banks also provide good exposure to the region, which we believe should be a key beneficiary of nearshoring of global supply chains for the US market. We also continue to be highly selective in our exposure to Chinese equities. We have noticed more Chinese companies guiding for dividends and share buybacks. Underpinning our optimism is our well-rounded perspective. We remain cognisant of the key risks in our investment universe. We continue to keep a close watch on geopolitical tensions and government policies. We combine our bottom-up focus with these structural trends to identify opportunities in this sea of overlooked and under-researched companies
