Emerging Markets Insights - June 2018Jul 11, 2018

Key Points

Emerging markets suffered a setback in the first half of 2018 precipitated by investor concerns over rising US interest rates, US dollar strengthening and rising trade tensions, particularly between the United States and China. However, we do not foresee a derailment in emerging-market fundamentals, which should continue to grow at a strong pace.

Manraj Sekhon

Manraj Sekhon, CFA
Chief Investment Officer, Emerging Markets Equity
Franklin Templeton Investments

Chetan Sehgal

Chetan Sehgal, CFA
Senior Managing Director, Director of Portfolio Management,
Franklin Templeton Emerging Markets Equity

Three Things We’re Thinking About Today

  1. Saudi Arabia’s inclusion to the MSCI Emerging Markets Index, which is likely to happen in at least two tranches over May and August 2019, could transform the Kingdom’s capital market and boost the wider MENA region. With only US$9 billion in foreign investment in the Kingdom’s stock exchange, Saudi Arabia’s new EM status is likely to bring with it significant foreign inflows, which could, in the long-term, trickle through to surrounding economies as well. Improving economic fundamentals may also attract investors.

  2. The Indian banking system is one of the fastest growing in the world. Taking into account that India’s formal economy remains a fraction of the country’s GDP and that only half of the population’s savings are in financial assets, there is significant growth potential for banks. Private-sector banks currently have a market share of ~30%, while state-owned banks make up the rest. State-owned banks, however, are less competitive and lag in areas like automation, technology, customer service and management quality. Thus, we expect private sector banks to grow faster and gain market share. Recent concerns about high levels of bad loans at state-banks could also benefit private lenders.

  3. A truckers’ strike over diesel prices heightened investor concerns in Brazil, weighing on equity prices across the market. However, we believe that opportunities for longer-term investors have emerged as quality stocks are now trading at lower valuations. Overall, we are generally positive on the investment opportunities in Brazil given the continued emphasis on reforms. The country also has great export potential in manufacturing and agriculture, which we believe should reflect in better GDP figures going forward.

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Emerging Market Outlook - June 18

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Related Fund

W(acc)

Templeton Global Emerging Markets Fund
Aims to provide long-term capital growth by investing primarily in emerging market equities.


What Are the Risks?

All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. To the extent a portfolio focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a portfolio that invests in a wider variety of countries, regions, industries, sectors or investments. Investing in smaller company securities that may have limited liquidity involves additional risks, such as relatively small revenues, limited product lines and small market share.


Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. Because market and economic conditions are subject to rapid change, opinions provided are valid only as at the date indicated. The portfolio managers’ analysis of issues, market sectors, and of the economic environment may have changed since the date of this commentary. Charts included are for illustrative and discussion purposes only and are subject to change. There is no assurance that any forecast, projection or estimate will be realised or that any investment strategy will be successful. Past performance does not guarantee future results.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at the publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. All investments involve risks, including possible loss of principal.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. Statements of fact are from sources considered to be reliable, but no representation or warranty is made as to their completeness or accuracy. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

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