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January 11, 2013
Monthly Commentary
31 May 2017
Templeton Emerging Markets
MONTHLY COMMENTARY
SUMMARY
“We believe the recent improvement in emerging-market fundamentals
should be helpful for continued strength in emerging-market equities.”
Dr. Mark Mobius provides a quarterly overview of emerging markets and
the key statistical data driving his outlook for Asia, Africa, Eastern Europe
and Latin America.
Mark Mobius, Ph.D.
Executive Chairman
Templeton Emerging Markets
Group
Overview
Outlook
Global equity markets rose in May, with US and European
markets lifted by upbeat first-quarter 2017 corporate earnings and
signs of an increasingly synchronised global expansion that
helped offset lower commodity prices and various geopolitical
concerns. Emerging markets outperformed their developedmarket peers, with the MSCI Emerging Markets (EM) Index
returning 3.0%, compared with a 2.2% gain in the MCSI World
Index, in US-dollar terms.
Sentiment in emerging markets has remained positive as the
year has progressed, and the asset class has continued to
attract net inflows. Emerging economies have already largely
adjusted to forthcoming interest rate rises, with currencies and
equity markets having rebounded substantially, further
supported by reformist business-friendly governments in many
countries.
Frontier markets outperformed emerging and developed markets,
with the MSCI Frontier Index up 4.3% in US-dollar terms. Nigeria,
Kenya and Romania were among the top-performing markets,
ending the month with double-digit returns. Stability in the foreignexchange market coupled with undemanding valuations drove
stock prices in Nigeria.
After a bullish start to the year, commodity markets sank to fivemonth lows in May as they came under selling pressure despite
signs of broadening, gradual improvement in the global economy
and forward demand indicators. The WTI crude oil spot price
declined 2% despite the decision by OPEC, the Organization of
Petroleum Exporting Countries, to extend production cuts for an
additional nine months. Among base metals, iron-ore prices fell
nearly 20% on oversupply concerns.
Emerging market currencies appreciated slightly against the US
dollar in May. Supported by a stronger euro, Central European
currencies such as the Czech koruna, Hungarian forint and Polish
zloty were among the top-performing currencies, while the
Argentine peso, Nigerian naira and Brazilian real depreciated.
Emerging market equity funds continued to record net fund
inflows in May, bringing the year-to-date total to over US$30
billion, with global emerging market funds accounting for a
majority of additional flows.
We believe the continued improvement in emerging market
fundamentals should be helpful for continued strength in
emerging market equities. Nonetheless, we are mindful of
potential volatility and remain watchful for risks, including
uncertainty about US policy, potential currency moves and
political risk in markets such as Brazil.
The landscape for investing in emerging markets has changed
over the years. At present, our main investment themes
include information technology (IT) and consumers. Our focus
is on earnings sustainability as a result of innovation,
dominant platforms or technology. We are also looking at
markets with favourable demographics, which would allow for
growth in under-penetrated categories, especially consumer
discretionary. The consumption theme expands beyond goods
to also include services, which are broadly becoming greater
parts of the emerging-market economy and less exposed to
global trade policies and currency volatility.
We are of the opinion that the fundamentals of emerging
market equities remain attractive. In terms of valuations, the
MSCI Emerging Market Index had a price-to-earnings ratio
(P/E) of 15.2x and a price-to-book value (P/B) of 1.7x,
compared with a P/E of 21.7x and P/B of 2.3x for the MSCI
World Index, as at end-May.
The value of investments may go down as well as up and investors may not get back the full amount invested
Performance Summary
Asian markets outperformed their global counterparts, with
South Korea and China among the top performers. Easing
geopolitical tensions, fund inflows and generally positive
quarterly results drove equity prices in South Korea. China
advanced, despite a credit-rating downgrade by a major ratings
agency, as IT, real estate and consumer discretionary stocks
generally led the country’s equity gains.
Foreign buying continued to drive Taiwan's market, with IT and
financial companies attracting the most inflows. International
ratings agency Standard & Poor’s raised Indonesia’s credit
rating to investment grade, bringing it in line with Moody’s and
Fitch, supporting equity prices.
Although equity markets in Thailand, Malaysia and India
recorded positive returns, their performances lagged that of
their regional peers in May. Generally disappointing first-quarter
corporate earnings weighed on Thai equities, while the energy
and materials sectors underperformed in Malaysia. The Indian
economy rose by a less-than-expected 6.1% (annualised) in the
first quarter of 2017.
Latin America was among the weakest-performing regions,
largely due to the political crisis in Brazil, which pressured stock
prices in that market after a period of strong performance.
Brazil, however, posted its first quarter of gross domestic
product (GDP) growth following its longest recession on record,
and the country’s central bank continued cutting its benchmark
interest rate.
Within Latin America, Peru, Argentina and Colombia
advanced the most, while Mexico and Chile were relatively flat.
Improved market sentiment in Peru on the heels of good
weather and public investment in infrastructure drove
outperformance, and Argentina benefitted from news regarding
the possibility of reclassification to emerging-market status by
MSCI. Mexico’s central bank raised its benchmark rate to its
highest level in eight years in response to continued rising
inflation.
Russia was among the weakest performers in Europe and
globally, on investor concerns that lower oil prices could impact
both 2017 corporate earnings growth and recent rouble
strength. Hungary and the Czech Republic outperformed,
supported by better-than-expected first-quarter GDP growth
rates and appreciation in their domestic currencies, while
Turkey also ended the month with positive returns. Elsewhere,
South Africa's market ended the month in positive territory,
supported by a stronger rand and despite continued focus on
politics.
Key Developments
One of the top-performing emerging markets in May, South
Korea's equity market remained on an upward trend, with the
KOSPI Index reaching a record high during the month. Foreign
investors continued to support the market. In terms of sectors,
consumer discretionary, consumer staples and industrials
outperformed in May, having previously lagged their peers, on
an improving global and domestic environment.
The election of President Moon Jae-in and his nomination of
top-level officials demonstrated the new government's hawkish
stance
on
chaebols
(large
family-owned
business
conglomerates). Market speculation on restructuring efforts in
holding companies and some chaebol group companies also
drove stock prices, as did easing geopolitical tensions between
China and South Korea. Consumer and business sentiment
also improved in May. We continue to like companies in the IT
and automobile component sectors as we think they are well
positioned to benefit from technological advances. We also
believe that the construction and engineering sectors are
attractive and have the potential to recover from a low base.
Brazil's equities rose in early May before accusations of
President Michel Temer allegedly endorsing bribe payments
engulfed the market, resulting in a 15% correction in US-dollar
terms in one day, as investors speculated about hindrance in
the implementation of reforms and concerns over the
economy’s recovery. To calm the market, the Finance Ministry
stressed its commitment to the reform agenda and fiscal
targets. Supported by foreign inflows, the equity market
rebounded off the month-low to end May with a 5% decline in
US-dollar terms. The downward trend in inflation, which moved
below the central bank’s target in April, has allowed for
continued interest rate cuts, bringing borrowing costs down to
their lowest level since late 2013. The government seems to be
moving in the right direction and that the reform movement will
continue, albeit at a slower pace. Opportunities remain in Brazil,
with many companies trading below their true long-term value.
We remain well positioned in financials and consumer-related
stocks. Banks are showing signs that the worst of the provisions
for bad loans have been completed, and we could see banking
portfolios with improved asset quality in 2017. In the consumer
space, we continue to favour companies with low-ticket cash
sales that may be able to weather the weak consumer
environment and whose balance sheets could benefit from a
decline in interest rates during 2017.
A laggard in April, the real estate sector outperformed its peers
in May, predominantly due to strong returns in mid-cap Chinese
property developers with exposure to low-tier cities. In the first
four months of 2017, the volume of property sales in tier-1 and
top tier-2 cities declined 23% year-on-year (y/y) and 9% y/y,
respectively, but tier-3 and 4 cities outperformed with a growth
of 24% y/y, as policy tightening curbed demand in higher-tier
cities such as Shanghai and Beijing. During the month,
Standard & Poor’s also upgraded the corporate credit rating of
one company, primarily due to the fact that it was able to raise
capital at favourable terms, raising speculation of additional
credit upgrades in the sector. Southbound fund flows, from the
Chinese mainland to Hong Kong, and potential short-covering
further drove returns in the property stocks. However, we
generally do not believe that the strong sales trend in low-tier
cities can be sustained primarily due to a tightening credit
environment, relatively higher supply and the introduction of
new purchase restrictions in some cities. We are also beginning
to see signals that markets in low-tier cities located in the Pearl
River Delta and Yangtze River Delta may be beginning to cool
down. A few property companies with operations focused in
low-tier cities reported slower sales growth in May.
Emerging Markets Monthly Commentary
2
While the Chinese real estate sector has staged a striking
turnaround from a lengthy downturn, we have generally
remained on the sidelines, in part due to concerns about policy
and credit tightening, over-leverage and regulation.
Increased drilling activity and rising US production pressured
the price of crude oil, even as US inventories declined and US
crude exports more than doubled from a year earlier. The WTI
crude oil spot price fell 2.0% to US$48 per barrel in May, and it
was down 10.1% in the year to date. Crude prices were
impacted by persistent doubts about whether OPEC’s decision
to extend production cuts would be enough to alleviate global
oversupply conditions. OPEC and other producers, including
Russia, said they would extend the pact through March 2018
following the 25 May 2017 meeting. Implementation of the
OPEC agreement so far has been better than expected, but
upholding it is likely to become more complex as time passes.
The International Energy Agency said recently that global oil
supply and demand is close to coming into balance, and that
inventories should decline if OPEC sticks with its plan. We are
of the opinion that fundamental trends in energy markets remain
healthy despite commodity and share-price action that seems to
contradict this assessment. In the current environment of
generally supportive fundamentals mixed with weak share-price
performance, we are seeing some attractive investment
opportunities in the sector, several of which are considered
premier operators that have historically traded at premium
valuations and now appear to be trading at more compelling
valuations.
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performance is not an indicator or a guarantee of future
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