Download Monthly Emerging Markets Review

Monthly Emerging Markets
Review
April, 2017
Mark Mobius, Ph.D.
Executive Chairman, Templeton Emerging Markets Group
OVERVIEW
Emerging equity markets continued to advance in April, outpacing the move in developed markets, despite evolving
geopolitical tensions in the Middle East and Korean peninsula, and fading confidence in US President Donald
Trump’s reform agenda. Positive developments in Europe, especially the outcome of the first round of the French
presidential election, boosted equity-market sentiment globally. The MSCI Emerging Markets Index returned 2.2%,
compared with a 1.5% gain in the MCSI World Index, in US-dollar terms.
Frontier markets lagged emerging and developed markets, with the MSCI Frontier Index up 1.2% in US-dollar
terms. Sri Lanka did particularly well, ending the month with double-digit returns, while weakness in the Tunisian
dinar weighed on equity returns in that market.
Commodities were generally weak in April, with iron-ore prices falling more than 10%, impacted by lower Chinese
steel prices and oversupply concerns. Crude oil prices also ended April in negative territory, while gold was among
the best-performing commodities, driven by safe-haven demand amid geopolitical tensions.
Emerging-market currencies were generally flat against the US dollar in April. The Czech koruna, Turkish lira and
Polish zloty were among the top-performing currencies, while the Chilean peso, South Korean won and Brazilian
real depreciated.
Emerging-market equity funds continued to record net fund inflows in April, bringing the year-to-date total to over
US$20 billion, with global emerging-market funds accounting for a majority of additional flows.
OUTLOOK
The resilience and recovery of emerging markets is evident as investors look beyond recent fears of rising US
interest rates and the potential impact of President Trump’s policies. Emerging economies have already largely
adjusted to forthcoming interest rate rises, with currencies and equity markets having now rebounded substantially,
further supported by reformist business-friendly governments in many countries.
In addition to a cyclical recovery in commodities, which supports certain emerging markets, the secular shift
towards innovation, technology and consumption has resulted in high-growth investment opportunities in sectors
different from more traditional industries that were strong in the past.
We believe the recent improvement in emerging-market fundamentals should be helpful for continued strength in
emerging-market equities, and we also believe valuations in these markets appear attractive relative to developed
markets. Nonetheless, we are mindful of potential volatility and remain watchful for risks, including uncertainty
about the new US administration’s policies and potential currency moves.
At the stock level, valuations remain cheap, but a change we have recently seen is an inflection point in corporate
earnings—which are now accelerating—further reinforcing the potential for outperformance of the asset class, in
our view. The MSCI EM Index had a price-to-earnings ratio (P/E) of 15.2x and a price-to-book value (P/BV) of
1.6x, compared with a P/E of 22.4x and P/BV of 2.3x for the MSCI World Index, as of end-April.
© 2017 Franklin Templeton Investments. All rights reserved.
Monthly Emerging Markets Review
April, 2017
PERFORMANCE SUMMARY
As a group, Asian markets closely matched the advance in their emerging-market peers. The Philippines, Malaysia
and Indonesia made the strongest gains. All three markets benefitted from net buying by foreign investors. The
introduction of a government-supported infrastructure campaign and potential tax-bill progress further aided
sentiment in the Philippines.
Better-than-expected first quarter gross domestic product (GDP) growth of 6.9% year-on-year, together with easing
concerns about capital outflows and renminbi depreciation, supported equity prices in China. Strength in the
information technology (IT) sector and net foreign inflows continued to drive the Taiwanese market.
The positive move in India came amid a strengthening of the rupee, and despite net selling by foreign institutional
investors and a mixed start to the quarterly results season. The Thai market was flat in April as weakness in the
financials and telecommunication services sectors offset strength in energy and consumer-related companies.
Latin American equities reported mixed performances in April, with Argentina and Mexico recording gains, while
Peru and Colombia declined. Telecommunication services and health care led gains in Mexico, while consumer
discretionary and energy were among the leading sectors in Argentina.
The Brazilian market was flat due to depreciation in the real and weakness in the government’s fiscal position, and
despite advances in structural reforms and an easing monetary policy. Peru was among the weakest emergingmarket performers on disappointing macroeconomic data, while market sentiment in Colombia was impacted by
depreciation in the peso and a weak economic environment.
European markets were among the best performers, with Turkey, Poland and Greece ending the month with doubledigit returns in US-dollar terms. Politics was key in Europe, with attention focused on the French elections, the UK
prime minister calling for a snap election in June and a referendum in Turkey.
Equity prices in Turkey were supported by appreciation in the lira and the passing of the referendum on the package
of constitutional amendments. Despite a larger-than-expected cut in the benchmark interest rate, a decline in crudeoil prices and depreciation in the rouble exerted pressure on Russian equities.
The South African market rebounded in April after weakness in March, in spite of credit-rating downgrades to junk
status by two major international rating agencies and widespread protests over the recent cabinet reshuffle.
KEY DEVELOPMENTS
With a return of nearly 12% (in US-dollar terms), Turkey was one of the best-performing emerging markets in
April, supported by appreciation in the lira. The referendum on the package of constitutional amendments leading to
an executive presidency was approved by a narrow margin, alleviating some investor concerns. Recent data pointed
towards a gradual recovery in economic activity and moderate improvement in domestic demand. However, costpush pressures and volatility in food prices in recent months have led to a sharp increase in inflation. A tight stance
in monetary policy is expected until the inflation outlook shows a significant improvement. Trading at a P/E of
10.5x, Turkey remains one of the most undervalued markets in the emerging-markets universe, in our view. The
country, however, has been beset by a number of issues, including a coup attempt in July 2016, a weaker lira,
slowing economic growth and deteriorating relations with the European Union. We remain cautious on the market;
however, if the government is able to improve GDP growth, reduce unemployment and increase consumer
confidence, the consumer discretionary sector could offer some potential.
© 2017 Franklin Templeton Investments. All rights reserved.
Monthly Emerging Markets Review
April, 2017
Chinese equities outperformed their emerging-market peers in April, supported by acceleration in domestic
consumption, a revival of private investments, a recovery in export demand and easing concerns about trade friction
with the United States. After the tightening of capital outflows by the People’s Bank, the Chinese renminbi is also
seeing some stability against the US dollar. The earnings outlook for corporates also appears positive as many
companies could benefit from reflation in the industrials sector and recovery of capital expenditure. However, the
need for the government to push supply-side reforms and for deleveraging may lead to a tightening of domestic
liquidity, and we believe this could result in weaker market sentiment in the interim. Rising geopolitical tensions in
the Korean peninsula and interest rate increases by the US Federal Reserve may also add to uncertainty over the
market's development in the near to medium term. Our exposures are mainly concentrated in the internet services
and automobile industries. We remain cautious of China’s banks as non-performing loan recognition dampens our
outlook for the country’s financial firms. Like banks, China’s real estate sector has staged a striking turnaround
from a lengthy downturn, but we have remained on the sidelines, in part due to risks of overleverage and regulation.
Driven by solid economic growth and improving consumer confidence in emerging markets, the consumer
discretionary sector was among the top performers in April, as well as for the year-to-date. We believe that
companies in consumer-related industries remain attractive in the current environment. These stocks can provide an
effective means to gain exposure to emerging-market economic expansion and, in particular, access to growth in
spending as rising regional wealth fuels a burgeoning consumer class. For example, we think the automobile market
is one of the most promising sectors in emerging markets. Many emerging countries still have a great deal of pentup demand as penetration rates remain quite low versus developed markets. In addition, there has been substantial
technological change in the industry, with greater focus on efficiency, lower emissions and a move towards electric
vehicles. Another area that is interesting is online retailing as it continues to grow because of evolving consumer
behaviour.
IT is becoming increasingly integral to and competitive in emerging markets, with the sector outperforming its
counterparts in April. Although we are cautious of the rapid share-price advances in some China-based internet
stocks, we continue to see value in the sector across emerging markets as a whole. Further, the Chinese government
remains focused on its “Internet Plus” strategy, where the internet sector will play a key role in fuelling China’s
next stage of economic growth. There are numerous opportunities for companies to expand locally, especially in
attracting consumers from the country's rural areas, where more than 40% of the population resides. In addition to
internet companies, which stand to benefit from the move towards more online transactions, we see potential for
attractive long-term investment opportunities in the following areas: shopping, gaming and other services, hardware
companies providing application processors and memory chips for smartphones, graphic processing units for data
centres and artificial intelligence applications, as well as connectivity and processor integrated circuits for
autonomous cars and devices related to the “Internet-of-Things.” In the memory segment, smartphones have been
upgrading memory content for better performance, which helped demand for and pricing of DRAM chips. We now
see a more favourable supply and demand situation, as opposed to the oversupply of a year earlier.
© 2017 Franklin Templeton Investments. All rights reserved.
April, 2017
Monthly Emerging Markets Review
IMPORTANT LEGAL INFORMATION
This document 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 the Franklin Templeton Luxembourg-domiciled SICAVs. Nothing in this document should be construed as investment
advice.
Franklin Templeton Investments have exercised professional care and diligence in the collection of information in this document. However, data
from third party sources may have been used in its preparation and Franklin Templeton has not independently verified, validated or audited such
data. Opinions expressed are the author’s at publication date and they are subject to change without prior notice. Given the rapidly changing
market environment, we disclaim responsibility for updating this material.
Any research and analysis contained in this document 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 document 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. In
emerging markets, the risks can be greater than in developed markets.
Issued by Franklin Templeton International Services S.A. - Professional of the Financial Sector under the supervision of the Commission de
Surveillance du Secteur Financier - 8A, rue Albert Borschette, L-1246 Luxembourg - Tel: +352-46 66 67-1 - Fax: +352-46 66 76.
Franklin Templeton
International
Services S.à.r.l.
8A,
rue
Borschette
Albert
L-1246 Luxembourg
© 2017 Franklin Templeton Investments. All rights reserved.
www.franklintempleton.lu
Monthly Emerging Markets Review
© 2017 Franklin Templeton Investments. All rights reserved.
April, 2017