Chetan Sehgal, Lead Portfolio Manager of Templeton Emerging Markets Investment Trust, provides an outlook on emerging markets and says the asset manager remains optimistic on the sector’s potential performance in 2024.
At the end of 2023 emerging market equities rose but lagged their developed market counterparts. Equities reacted positively to the US Federal Reserve’s guidance that it might begin cutting interest rates in 2024.
The emerging Asia region advanced. South Korea and Taiwan led gains, powered by corporate earnings and a technology sector rally on expectations of a recovery in the semiconductor cycle. South Korean equities benefitted further from a short-selling ban. Indian equities were boosted by strong macroeconomic datapoints, a drop in oil prices and favourable results for the incumbent government in the regional elections.
A downgrade of China’s credit outlook and a lack of strong stimulus from the China Economic Work Conference negatively impacted investor sentiment. Shares of technology companies in China corrected after new draft rules to tighten regulations in the sector were unveiled. However, subsequent clarity and the approval of new game titles alleviated some concerns.
Stocks in the emerging Europe, Middle East and Africa region tracked higher. Key markets saw a recovery towards the end of 2023 on expectations of a rally in oil prices due to supply disruptions. The election of a pro-European Union government aided Polish equities. However, concerns about the Israel-Hamas conflict weighed on sentiment.
Equities in Latin America also performed well. In Brazil, stocks were partially driven by local rate cuts. Mexico’s central bank chose to keep interest rates steady. Details of a master development plan of a Mexico-based airport operator sent shares of fellow airport operators rallying towards the end of the quarter. This plan helped to moderate uncertainty regarding the impact of tariff changes on the earnings of airport groups.
Outlook
Despite bouts of volatility, Emerging Market equities delivered positive returns in 2023. While challenges persist, we remain optimistic on Emerging Markets for 2024.
A decline in US interest rates should be positive for Emerging Market equities. Most Emerging Markets have either kept interest rates steady or commenced rate cuts. This should drive consumption and growth in capital expenditure.
China’s recovery has been weaker than anticipated. A troubled real estate market and weak consumer confidence have weighed on the country’s economy and equities. Despite a positive base effect, the lack of strong policy support from the government and weak sentiment could deter a strong recovery in the near term. South Korea and Taiwan have seen a rally amidst expectations of a recovery in the semiconductor cycle. India has continued to report strong macroeconomic datapoints. In Brazil, there has been some clarity on tax reforms, which has been an overhang on the domestic equity market.
Many key Emerging Markets have upcoming national elections. In our view, we are likely to see a continuation of existing policies in most of these markets.
The semiconductor cycle has remained weak due to slower demand. However, we see signs of this bottoming out. With the emerging popularity of artificial intelligence, there has been a demand uplift. In the electric vehicle space, 2023 was a year of intense competition and slower demand growth. This led to price cuts and affected profitability. We believe this remains a key growth area alongside the renewable energy segment.
We remain focused on the longer-term story—national commitments underpinning energy transition to a cleaner environment should support the longer-term structural trend supporting the growth potential of these industries.
Against this backdrop, we continue to search for companies that have long-term earnings growth potential, trade at a discount to intrinsic worth, and have competitive advantages that we believe are persistent and could be repeatable over time.
