Emerging Markets Q3 Recap: Sentiment Remains Strong
Templeton Emerging Markets Group has a wide investment universe to cover—tens of thousands of companies in markets on nearly every continent! While we are bottom-up investors, we also take into account big-picture context. Here, I outline what’s happened in the emerging-markets universe in the third quarter of the year, including some key events, milestones and data points going back a bit further to offer some perspective. Overall, emerging markets saw a strong quarter despite a few global market uncertainties.
Global stock markets rose during the third quarter amid generally positive macroeconomic data and accommodative monetary policy across many regions. However, uncertainty about the US Federal Reserve’s (Fed’s) timing for raising interest rates and concerns surrounding the United Kingdom’s historic vote to leave the European Union (EU) weighed on market sentiment at certain points. Broadly, both emerging and developed equity markets advanced, with emerging-market equities generally outperforming their developed-market peers as improving fundamentals and higher yields drove fund flows into emerging markets. The MSCI Emerging Markets Index returned 9.2%, above the 5% gain in the MCSI World Index, both in US dollar terms.1
The Fed kept interest rates on hold during its September meeting, but indicated the case for a rate increase was now stronger. Other key developments included the approval of the Shenzhen-Hong Kong Stock Connect program, India’s parliament passing the Goods-and-Services Tax reform and the impeachment of Brazilian President Dilma Rousseff. Meanwhile, crude oil prices rebounded in late September as the Organization of the Petroleum Exporting Countries (OPEC) agreed to production cuts.
Markets in Asia continued to gain, making it the strongest-performing emerging-market region for the quarter. The Chinese, Taiwanese, Hong Kong and South Korean markets all produced double-digit returns, while Indonesia, Thailand and India also recorded gains. The Philippines and Malaysia were the weakest markets, ending the quarter with declines. Hong Kong benefited from net flows from its share-trading link with Shanghai and strength in the gaming and property sectors. China’s markets gained as macroeconomic figures continued to show improvement. In Taiwan, the central bank left rates on hold in its meeting at the end of the period, while South Korea’s second-quarter gross domestic product (GDP) growth data were revised upward.
In Latin America, Brazil stood out with a strong performance as investors cheered the impeachment of Rousseff and welcomed Michel Temer as the country’s official president. Weakness in the peso and a tightening monetary policy, however, led the Mexican market to decline during the quarter. Uncertainty surrounding the peace referendum limited gains in Colombia, while low copper prices and a weak economy led the Chilean government to announce a restrictive 2017 budget, impacting investor confidence.
The Hungarian market benefited from an acceleration in GDP growth in the second quarter and low interest rates, while a rebound in oil prices in the last two months of the quarter, an interest-rate cut and better-than-expected second quarter economic-growth data supported Russian equities. A failed coup attempt, imposition of a three-month state of emergency as well as weakness in the lira caused Turkish equities to lag global markets.
Country Updates by the Numbers
For those who are interested in really diving into the numbers, I am including some country updates that show changes in key economic indicators and measures more recently and going back further.
China’s economy grew by a slightly better-than-expected 6.7% year-on-year (y-o-y) in the second quarter as government stimulus and a buoyant property market drove industrial activity and retail sales activity showed solid growth. The consumer price index eased to 1.3% y-o-y in August, from 1.8% y-o-y in July, mainly due to lower food price inflation, while producer prices declined 0.8% y-o-y in August, compared with a 1.7% y-o-y decrease in July. Growth in industrial production rose to a five-month high of 6.3% y-o-y in August, from 6.0% y-o-y in July. Fixed asset investment increased 8.1% y-o-y in the first eight months of 2016, unchanged from the growth in the first seven months of the year. Retail sales growth rose to 10.6% y-o-y in August, from 10.2% y-o-y in July, largely driven by strong car sales. Exports declined 2.8% y-o-y to US$190.6 billion in August, while imports rose 1.5% y-o-y to US$138.5 billion, its first increase in nearly two years. This resulted in a trade surplus of US$52.0 billion for the month. Foreign-exchange reserves declined by US$15.9 billion to US$3.2 trillion in August. The government approved the launch of the Shenzhen-Hong Kong Stock Connect program in August, which will allow investors direct access to the two stock markets.
GDP growth in South Korea accelerated to a revised 3.3% y-o-y in the second quarter, from a reading of 2.8% y-o-y in the first quarter. Key growth drivers included private consumption and investment. The Bank of Korea (BOK) trimmed its 2016 growth forecast to 2.7% from 2.8%. The BOK maintained its benchmark interest rate at a record low of 1.25% for the third consecutive month in September to support the economy’s recovery. Inflation remained below the BOK’s 2% target rate for 2016. The consumer price index eased to 0.4% y-o-y in August, from 0.7% y-o-y in July. Exports grew for the first time since end-2014 in August, with a 2.6% y-o-y increase to US$40.1 billion. This followed a 10.2% y-o-y decline in July. Imports also rose, edging up 0.2% y-o-y, the first increase in two years. The trade surplus widened to US$5.3 billion in August, from US$4.3 billion a year earlier, but was smaller than the revised US$7.6 billion surplus recorded in July. The government announced a US$5.2 billion supplementary budget to help stimulate the economy.