Emerging Markets Fourth-Quarter Recap and Outlook: 2017 Ends with a Bang

Templeton Emerging Markets Group has a wide investment universe to cover—tens of thousands of companies in markets on nearly every continent. While we are bottom-up investors, we also take into account big-picture context. Stephen Dover presents the team’s overview of what has happened in the emerging-markets universe in the fourth quarter of 2017, including some key events, milestones and data points to offer some perspective.

Three Things We’re Thinking about Today

1. The US Federal Reserve (Fed) raised its key interest rate by 25 basis points in December, its third increase in 2017 and in line with market expectations. The Fed is widely expected to raise the rate three times in 2018. Despite increasing concern, the impact of these rate hikes on emerging markets has thus far has been limited, partly because the normalization of monetary policy in the US was anticipated, and also thanks to sound growth and fundamentals in major emerging markets.

͏2. Politics was at the forefront in December as elections in South Africa, India and Chile grabbed investors’ attention. As we step into 2018, politics continue to warrant our attention as three major emerging-market (EM) economies—Brazil, Mexico and Russia—will hold presidential elections. While there is little doubt that President Vladimir Putin will be re-elected for a fourth term, Brazil and Mexico may see a change. With left-wing populist Andres Manuel Lopez Obrador leading in most opinion polls in Mexico, we expect increased market volatility and continue to monitor the situation closely. In Brazil, we expect a favorable outcome with the new president likely continuing to implement key reforms.

3. Emerging markets recorded inflows of about US$80 billion in 2017, compared to minor inflows in 2016 and outflows in 2013-2015. While 2017 was the third-best year for emerging markets in terms of asset inflows in absolute terms, after 2010 and 2009, in more than 20 years, relative to market capitalization, the recovery of flows has been relatively milder. There may be volatility ahead, particularly as investment flows can often reflect ever-changing attitudes to perceived risk, with inflows as investor sentiment moves “risk-on” and outflows as it moves “risk-off.” Even so, major global investors have a lower proportion of exposure to the asset class, below what we would expect given the proportion of global GDP (gross domestic product) and market capitalization that emerging markets represent, and that could support continued inflows.