Interest rates continue to be one of the key drivers for Emerging Markets, says Chetan Sehgal, Portfolio Manager, TEMIT, in his latest outlook.
The US Federal Reserve started to reduce interest rates and signalled two more reductions this year. This raised investor sentiment globally, fostering hopes for better economic growth. For the quarter, the MSCI EM Index returned 12.62% while the MSCI World Index rose by 9.19%, both in net UK-sterling terms.
Stocks in the emerging Asia region collectively rose. A technology rally unfolded in China, as technology companies reported artificial intelligence (AI) product rollouts, fostering confidence in these companies’ expenditure on AI. Chinese semiconductor firms benefitted from the government’s intent to strengthen its domestic semiconductor industry. Equity markets in South Korea and Taiwan benefitted from AI-related sentiment, with the former maintaining its upwards momentum with South Korea’s confirmation not to lower its capital gains tax threshold for equities.
Indian equities were an anomaly as they declined for the period. Information technology stocks suffered from a large fee hike in H1-B, or non-immigrant visas in the United States. While the impact is not expected to be material, this further soured sentiment towards Indian information technology companies. The government’s overhaul of the goods and services tax structure, however, caused a broad-based rally and helped to overcome some weakness.
Equities in the emerging Europe, Middle East and Africa (EMEA) region collectively advanced despite tensions in the region. On a regional level, geopolitics was factored in, with the continuation of unease in Gaza, Israel and Iran raising the region’s political risk premium. A weaker oil backdrop also capped gains. However, the lowering of interest rates in the United States helped the region to advance as a whole.
Equities in the emerging Latin America (LatAm) region generally gained. Brazil’s central bank opted to keep interest rates unchanged, but it did not rule out the resumption of a hiking cycle if appropriate. The benchmark interest rate now hovers at a near two-decade high of 15%. Conversely, Mexico’s central bank reduced interest rates for the 10th straight meeting to 7.5%.
Outlook
The outlook for emerging markets (EMs) has stabilised amid US-dollar weakness and a clearer global trade landscape. Trade policy uncertainties are fading, and EMs have taken a more conciliatory approach, seeking trade diversification while limiting the fallout from tariffs.
The anticipation of tariff-related economic slowdown has collided with fast developments in AI. Together with the pace of interest-rate cuts, collectively, the above factors should continue to be key drivers for EMs.
While there still remains uncertainty on US tariffs, direct impact of US tariffs on our portfolio holdings is limited. Most of the companies in the portfolio are industry leaders, and this allows them to alleviate the impact of tariffs by passing on the extra costs to the supply chain and customers. The semiconductor supply chain should continue to be a key beneficiary from investments in AI, and it remains a key overweight sector in the portfolio.
Chinese equities performed well, from policy initiatives and a friendlier stance towards the private sector. While India traded against tariff headwinds, we expect the situation to stabilise eventually. Brazilian equities shrugged off elevated US tariffs and are trading at deeply discounted valuations with attractive dividend yields.
We continue to remain upbeat about EM economies despite the current environment of slowing growth and geopolitical issues globally.
