Chetan Sehgal, lead portfolio manager of Templeton Emerging Markets Investment Trust (TEMIT), reflects on recent market moves in emerging markets.
Emerging market equities rose during the month and outperformed their developed market counterparts. Equity markets remained buoyant despite investors dialling back expectations for the pace and scale of interest-rate cuts by the US Federal Reserve. For the month, the MSCI EM Index-NR returned 5.46%, while the MSCI World Index-NR rose by 4.94%, both in sterling terms.
The emerging Asia region advanced. All countries within the MSCI EM Index ended higher. China led gains. The country’s efforts to stabilise its equity market eclipsed ongoing macroeconomic concerns. These efforts included China’s sovereign wealth fund’s plans to expand its purchases of exchange-traded funds and the country’s housing authority’s approval of real estate development loans.
A rally in semiconductor chip stocks benefitted the stock markets of Taiwan and South Korea. This rally was driven by a major US chip designer’s optimistic growth projection. The rising popularity of artificial intelligence (AI)—which is a driver of demand—underpinned the performance of these stocks. South Korea unveiled plans to encourage and support companies to return more capital to shareholders and improve governance. India rose on the back of improving macroeconomic data, but profit-booking curbed returns.
The emerging Europe, Middle East and Africa region also registered gains. While geopolitical tensions heightened in the region, higher oil prices aided the returns of Middle Eastern equity markets. Egypt also signed a deal with the United Arab Emirates for an urban development project in one of Egypt’s coastal regions. In South Africa, the national budget included plans to hike taxes and increase social grants to spur economic growth.
Equities in Latin America rose marginally. Brazil and Mexico expressed confidence in their macroeconomic outlook. Brazil’s government expects an economic growth exceeding 2% in 2024, with inflation reaching the midpoint of the central bank’s target range. Mexico’s central bank also believed that the country’s headline inflation will return to a downward trend. It also raised the probability of an interest-rate cut in the coming months.
Outlook
We continue to remain positive on EM equities. In our view, drivers for EM equities for the rest of 2024 include the likelihood that US interest rates have peaked, a potential recovery in earnings growth, and China’s economic outlook appearing to be past the worst.
EM ex-China equities have shown resilience in the face of elevated global interest rates. This is partly due to reforms, domestic consumption and generally healthy corporate balance sheets. Prior reforms have enabled countries such as India and Mexico to attract foreign investment and raise capital expenditure.
Equities in South Korea and Taiwan are expected to recover from an improving technology cycle. The semiconductor cycle is seeing a recovery, driven by AI demand. The anticipation of an end-market recovery and better growth has supported a recent rebound in the share prices of technology companies. The EV industry, however, has seen a material slowdown in growth expectations and a recovery is likely to be slower.
