While the outlook for emerging markets is less visible, says Chetan Sehgal, Portfolio Manager, Templeton Emerging Markets Investment Trust, there are reasons to be positive on the sector.
The outlook for EMs in 2025 appears to be shaped by a mix of valuation opportunities amid more cautious monetary policies. Domestic events have driven valuations in key markets such as South Korea and Brazil to new lows.There seems to be limited growth drivers in the near term, especially as the US Federal Reserve is expected to slow down its interest-rate cuts. EM central banks are likely to follow suit with more restrained monetary easing. Countries with weaker fiscal positions or trade imbalances could also face currency pressures. Some EM currencies have depreciated right below parity levels against the US dollar.
However, the strength of the US dollar remains a mixed factor. While a stronger dollar benefits export-driven sectors/industries, such as India-based information technology services with a strong customer base in the United States, it does impinge on some other sectors/industries in EMs. There are also uncertainties around tariffs, and we view this as a matter of negotiation.
Amid global uncertainties, in our view, the key structural trends for EMs remain entrenched. Demand for semiconductors remains strong, with the development of AI benefitting the semiconductor supply chain in EMs. There has been an emergence of alternative AI solutions that require much lower resources. While these could lead to lower hardware requirements for the same work requirements in the near term, this could also accelerate the proliferation of AI solutions. Slower rate cuts in EMs should allow banks to manage their asset-liability duration better, and the asset quality in the banks that we hold are, in our view, robust.
In broad terms, we remain positive on EM economies. While we recognise that the outlook is less visible, we have confidence in both the EM asset class and our strategies. We continue to seek high-quality businesses that, in our analysis, have solid balance sheets, competitive advantages and appealing valuations.
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