CIO assesses the space and urges investors to stay the course to benefit from drivers of growth
For investors with the stomach to stay the course and take advantage of global scope, emerging markets offer compelling opportunities.
That’s the view of Manraj Sekhon chief investment officer at Franklin Templeton Emerging Markets Equity, who believes that there are reasons to be optimistic about the asset class in 2020 and that technological innovation is leading to new investment opportunities in a number of countries.
He added that emerging markets are at a rare inflection point with multiple crosscurrents. A combination of the ultra-loose monetary policy hangover from the global financial crisis, a low global growth environment from weak manufacturing and industrial activity, the continued rise of the consumer, and the disruption and opportunities of the new economy have provided a heady mix.
Sekhon said: "While market sentiment in 2019 was weighed down by easing growth concerns, emerging market growth is forecast by the International Monetary Fund to accelerate in 2020 and remain more than double that of developed markets.
“Improving fiscal, economic and monetary policies and a renewed focus on structural reforms in many emerging markets has been gaining traction. Supported by more conducive monetary policies in developed economies and easing inflationary pressures, central banks in emerging markets generally turned more dovish in 2019. We expect this trend to continue in 2020, as policymakers have greater flexibility in stimulating economic activity.”
Addressing the trade conflict between China and US, he said that while tensions have de-escalated in the short term, Franklin Templeton Emerging Markets Equity expects the broader economic conflict to remain for some time, although a comprehensive agreement remains in the best interests of both sides. The Trump administration will be acutely aware of this heading into an election year, it added.
So where are the opportunities for 2020? Perversely, and eventually, China. It remains a frontrunner in the 5G arena and is expected to have some 600 million 5G subscribers by 2025, or about 40% of the forecasted 1.6 billion subscribers globally. Sekhon said that together with artificial intelligence (AI) and robotics, this will help drive growth in China’s new economy as it strives to become less reliant on the United States.
“In our view, China will emerge stronger and more self-reliant with multiple pillars of economic support through this crisis.”
Other areas in interest include:
“Taiwan has seen some spillover benefits from the trade war as its companies start onshoring some operations. Government incentives to attract operations back to Taiwan mean that this will have ripple effects on the domestic economy.”
“As one of the largest and fastest-growing markets for digital consumers, India is a market where disruptive technology is driving productivity and deflation more than generally expected, with value accruing to end-users. Key reforms—including the recent reduction in corporate tax rates, measures to improve the regulatory environment and monetary easing—will likely steady the economy.”
“Optimism surrounding the government’s economic agenda has resulted in a more favorable investment climate. While the country’s economic recovery has been slower than expected, we believe government and central bank efforts are improving the country’s longer-term growth potential. Inflation has remained under control, allowing the central bank to ease rates to record lows to stimulate the economy. Social security reform is key to stimulating investment and credit, which will help improve economic activity and can significantly reduce Brazil’s fiscal deficit. A major privatization plan has also been announced, and tax and other structural reforms should improve the ease of doing business.”
Sekhon believes that the emerging market landscape continues to transform as policymakers focus on building resilience during times of stress. He backed the asset class’ new level of diversification and pointed to domestic consumption and technology as being new drivers of growth, while adding that areas such as e-commerce, digital banking and mobile computing will be fundamental drivers of emerging markets for years to come.
He said: “Much noise and conflicting signals dominated 2019, which led many investors to limit their risk appetite and discount the long-term growth drivers in emerging markets. While some of these uncertainties may persist in the near term, we believe it is essential to stay the course. The markets are just beginning to realize opportunities from technology disruption and the transition of businesses away from traditional models. We believe the investment scope in the emerging world is wide and promising for investors who can overlook near-term volatility and invest for the longer term.”