In light of the Turkish lira and Argentine peso currency drops, fears of emerging-market (EM) contagion appear to be on the rise, and various EM currencies have been under pressure. Here, Franklin Templeton Emerging Markets Equity provides perspective on some of the impacted countries in the headlines recently: Argentina, Turkey, South Africa and Indonesia. In the team’s view, current EM weakness in select countries is not likely to result in macroeconomic contagion or broader asset-class crises.
Franklin Templeton Emerging Markets Equity
We think it is important for investors to take note that emerging markets are not homogeneous, and the countries that currently dominate the headlines represent a very small part of the EM universe. For example, more than 20 companies in the MSCI EM Index1 are individually larger than the entirety of the Turkish stock market. So these countries’ travails are not representative of the broader EM asset class.
Overall, we still have a constructive view on EM countries—most of which appear to be operating in an environment where economic growth is improving, commodity prices are stable, currencies in general are undervalued, and inflation is under control. The recent volatility allows us, as stock pickers, to identify fundamentally strong companies and invest at attractive valuations.
Since mid-August, there have been renewed attacks on the Argentine peso, and inflation expectations rose. This has prompted the government to formulate more aggressive fiscal policies, which have so far been met with skepticism by the market. In our view, the financial program committed by the Argentine government is demanding, particularly when facing a presidential election in 2019. But the incumbent administration has a strong commitment to follow through, and Argentina continues to have support from the International Monetary Fund (IMF) and the international community. However, significant political uncertainties remain leading up to the presidential elections in 2019, and the current economic contraction is expected to continue for several months at least.
We are closely monitoring the sustainability of the administration’s policies and the country’s economic recovery prospects. Given the current volatility and uncertainty, we currently favor companies with US dollar-linked revenues.