A number of factors spurred improved investor sentiment in emerging markets over the past month, including an interest-rate cut from the US Federal Reserve. Franklin Templeton Emerging Markets Equity outlines the news and events shaping market moves during October, and the reasons why the team is optimistic about the coming year.

Three Things We’re Thinking About Today

  1. News that the United States and China made progress in reaching a partial trade deal in October was cheered by investors globally. The “phase one” agreement, which was originally expected to be signed in November, is said to cover agricultural products purchases, financial services, currency and intellectual property. While the deal is still in flux, the United States did suspend the tariff increase on Chinese imports that was scheduled for October 15. Although the US-China trade conflict has been dominating headlines, it should be stressed that the impact of the conflict has not been limited to China; rather, we have seen global implications. In addition to diversifying its trading relationships, China has been turning less dependent on trade. Domestic consumption now makes up the lion’s share of China’s economic growth, accounting for 76% of gross domestic product (GDP) in 2018, up from 59% in 2017.1
  2. While concerns of a slowdown in economic growth have been weighing on market sentiment, the International Monetary Fund (IMF) expects global growth to accelerate in 2020, driven primarily by a recovery in economic activity in emerging markets (EMs). The IMF forecasts economic growth in emerging and developing economies to accelerate to 4.6% in 2020, from 3.9% in 2019, and more than double the expected 1.7% increase for advanced economies in 2019 and 2020.2 Improving fiscal, economic and monetary policies and a renewed focus on structural reforms in several EMs appear to be gaining traction. The results of these trends are expected to become more evident in strengthening GDP growth in 2020, which could also provide a more favorable operating environment for EM companies.
  3. Technology is expected to become a key driver of global growth, especially in EMs where companies have been using innovation and technology to leapfrog and disrupt traditional business models. EMs’ accelerating internet usage and penetration are likewise hastening opportunities for efficiencies, cost savings and ease of doing business. Since the turn of the century, we have also witnessed a significant increase in the trade value of “high-tech” goods being exported by EM countries. This includes a range of sectors including aircraft and spacecraft, automotive, electrical production and equipment, computing and data storage, as well as optical and medical technology equipment. Compound annual growth in these types of exports is expected to be 16% for the years 2017-2023.3

Outlook

Optimism toward EMs has picked up following another interest-rate cut by the US Federal Reserve (Fed), as well as increased expectations for the signing of “phase one” of the US-China trade deal. While both sides appear to be approaching a partial trade agreement, we remain cautious and expect to see some market volatility until a more comprehensive deal is finalized.

Despite the uncertainty, we continue to see investment opportunities across EMs. We expect overall corporate earnings to strengthen in 2020 as upturns in some parts of the technology sector offer support. We also consider valuations for EM equities to be attractive relative to developed market equities. Meanwhile, we remain on the lookout for areas where corporate governance could improve and potentially bolster shareholder value.

We are focused on identifying high-quality companies where we see sustainable earnings power, and which trade at what we think is a discount to their intrinsic worth. We see strong competitive advantages in several technology and consumer-related companies that are also among our top holdings, and we believe they have the potential to extend their market positions even in a challenging environment.