Emerging market equities saw mixed performances in February, with stocks in Asia faring better than stocks in Latin America and emerging Europe, which underperformed. Franklin Templeton's Emerging Markets Equity team outlines what drove market moves during the month and where they see opportunities today. They see reasons to be optimistic about Brazil in particular.
Three Things We're Thinking About Today
- US President Donald Trump's decision to delay the March 1 tariff hikes following progress in trade talks reduced global tensions. Reports that US and Chinese negotiators are working on the final details of a US-China trade deal boosted sentiment towards emerging markets (EMs). We remain cautiously optimistic as the United States and China continue to resolve their differences, while their trade relationship evolves. Even with a trade deal, however, long-term strategic rivalry is likely to continue. We also expect the Chinese government to continue supporting the domestic economy, as evidenced by the recent implementation of targeted fiscal and monetary policies. We will continue to monitor the situation and look for attractive investment opportunities—likely in sectors related to health care, consumption and manufacturing upgrades, which over the long term, are less directly impacted by tariff regime changes.
- Nuclear-armed rivals India and Pakistan faced their worst crisis in years during February over disputed territory in Kashmir. However, both countries have expressed that they do not wish to see further escalation of the situation. While one cannot rule out more border incursions from both sides, we believe chances of escalation are limited due to mounting international pressure calling for restraint. Recent developments are also viewed positively, with Pakistan releasing the captured Indian fighter pilot and taking steps to restrain terrorists. In our view, the current conflict has limited impact on investment strategy, and we retain conviction in our holdings in India and Pakistan. We are monitoring the situation closely, which remains fluid at this point.
- Brazilian President Jair Bolsonaro presented the long-awaited social security reform proposal to the Congress in February. We are of the view that the proposal, which includes a higher-than-expected estimated fiscal savings of about US $300 billion over 10 years, signals the president's commitment to improving the government's fiscal deficit. Although some dilution in the reform is expected, this is a step in the right direction, and we expect to see a strong emphasis on reforms and privatization from the new government. This should, in turn, provide a basis for higher economic growth and a better business environment for the companies. We continue to have a favorable view on domestic-oriented themes, including financials and consumer-related sectors. These should benefit from better economic activity in a low-inflation and higher credit-availability environment.
1.在贸易谈判取得进展后，美国总统唐纳德特朗普决定推迟三月一日的关税上调，这缓解了全球紧张局势。据报道，美国和中国谈判代表正在就美中贸易协议的最终细节进行磋商，此消息提振了人们对新兴市场的信心。随着美国和中国继续解决分歧，并改进其贸易关系，我们将对此保持谨慎乐观的态度。然而，即使达成了贸易协议，长期的战略竞争仍有可能继续。我们还预计中国政府将继续支持国内经济，最近实施的有针对性的财政和货币政策就是证明。我们将继续监测形势，并寻找有吸引力的投资机会 – 机会可能出现在与医疗保健、消费和制造业升级有关的行业，从长远来看，这些行业较少受到关税制度变化的直接影响。
3.二月份，巴西总统波索那罗向国会提交了期待已久的社会保障改革提案。该提案内容包括在未来 10 年内节省约 3000 亿美元的财政开支，高于人们的预期，我们认为这标志着总统承诺改善政府的财政赤字。尽管改革可能会有所淡化，但这是朝着正确方向迈出的一步，我们预计新政府将大力强调改革和私有化。这将进而为更高的经济增长和企业更好的商业环境提供基础。我们继续看好以国内为导向的主题，包括金融和消费相关行业。这些行业应该会受益于低通胀和更高信贷可用性的环境下更好的经济活动。
US interest-rate-hike expectations have declined sharply, spurring gains in EM currencies and equities, as well as large flows into the EM asset class. Easing global trade tension further benefited sentiment. However, we believe that for the market rally to be sustainable, earnings need to improve. Improved corporate governance in EMs could also argue for a longer-term rerating.
We believe technology will continue to reshape the global economy, as technology disruptors become the norm by transforming industry landscapes, e-commerce continues to accelerate, and companies continue to embrace technology and innovation.
The transformation of the EM consumer is another key theme for us. Favorable demographics and urbanization dynamics, coupled with an underleveraged EM consumer, bring opportunities to tap into a growing domestic consumer market, and rising affluence continues to drive premiumization.
As such, we continue to favor companies that provide exposures to these key themes of consumption and technology, where we have confidence in management's ability to deliver sustainable growth that we believe the market may be mispricing.
Emerging Markets Key Trends and Developments
EM equities edged higher in February, trailing developed-market (DM) stocks. Progress in US-China trade talks drove investor optimism that was later tempered by pockets of geopolitical and economic concerns. The MSCI Emerging Markets Index edged up 0.2% over the month, compared with a 3.1% return in the MSCI World Index, both in US dollars.1
二月新兴市场股市小幅走高，落后于已发展市场股市。美中贸易谈判的进展推动了投资者的乐观情绪，但后来受到一些地缘政治和经济问题的干扰。MSCI 新兴市场指数小幅上涨 0.2％，而 MSCI 全球指数的回报率为 3.1％，均以美元计算。 
The Most Important Moves in Emerging Markets This Month
- Asian stocks rose, with Taiwan, China and Malaysia posting the strongest returns. Hopes for an end to the US-China trade row lifted broad market sentiment. The United States delayed a planned increase in tariffs on Chinese goods as trade negotiations advanced. China's market also gained on signs of easing credit conditions in the country. Investor confidence was capped by geopolitical uncertainty amid rising military tensions between India and Pakistan. A US-North Korea summit aimed at denuclearizing the Korean peninsula also failed to achieve a deal. Markets in Pakistan, Indonesia and the Philippines recorded the largest declines.
- February saw Latin America give back some of January's strong gains. Equity prices in Brazil, Mexico and Chile declined. Profit-taking and disappointing 2018 gross domestic product (GDP) growth data weighed on the Brazilian market, despite the unveiling of a better-than-expected social security reform. In Mexico, mixed macroeconomic data and concerns surrounding the state-owned oil company weighed on investor sentiment. At the other end of the spectrum, Colombia and Peru recorded positive returns, supported by improving economic data.
- Equity markets in Emerging Europe declined in February, with Poland, Turkey and Russia leading the way down. Despite a rebound in oil prices, equity prices in Russia fell partly due to depreciation in the Russian ruble. Weakness in the Polish zloty was largely responsible for the decline in that market. The Czech Republic market, however, bucked the regional trend, ending the month with a small gain. The South African rand depreciated in February, following a strong gain in January, making South Africa one of EM's weakest markets in February.
- Frontier markets fared better than their EM counterparts but trailed DMs. Romania, Vietnam and Nigeria led returns. Investors in Romania reacted positively to the government's largest draft budget, which did not include revenue estimates from a recently discussed bank levy. Elections dominated headlines in Nigeria, where following a one-week delay, President Muhammadu Buhari was re-elected. Following a strong performance in January, Argentina ended the month with a double-digit decline, partly due to a weak Argentine peso. Rising inflationary pressure and concerns about austerity measures also impacted investor confidence.
- 二月份，拉丁美洲回吐了一月份的部分强势涨幅。巴西、墨西哥和智利的股票价格下跌。尽管推出了好于预期的社会保障改革，但套利和令人失望的二零一八年国内生产总值 (GDP) 增长数据令巴西市场承压。在墨西哥，宏观经济数据喜忧参半，围绕国有石油企业的担忧打压了投资者的情绪。另一方面，哥伦比亚和秘鲁在经济数据改善的支持下取得积极回报。
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What are the Risks?
All investments involve risks, including the possible loss of principal. Investments in foreign securities involve special risks 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. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.
1. Sources: MSCI, FactSet as of February 28, 2019. The MSCI Emerging Markets Index captures large- and mid-cap representation across 24 emerging-market countries. The MSCI World Index captures large- and mid-cap performance across 23 developed markets. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or guarantee of future results.