October Market Recap and Outlook: A Sea of Opportunities

Emerging markets continued to struggle in October amid an environment of heightened equity-market volatility globally. Manraj Sekhon, CIO of Franklin Templeton Emerging Markets Equity, and Chetan Sehgal, senior managing director and director of portfolio management, believe the pullback presents long-term investors with opportunities amid what they dub an overreaction. They present the team’s overview of the emerging-markets universe in October.

Three Things We’re Thinking about Today

  1. Jair Bolsonaro emerged victorious in Brazil’s presidential election, solidifying investors’ optimism for a more market-friendly policy approach. Looking forward, we believe this should be positive for earnings growth and for the Brazilian equity market generally. Political stability could also result in a more favorable climate where consumer and business confidence can pick up again and lead to an acceleration in domestic economic activity. The local market is trading at what we view to be reasonable price-earnings levels and should have more scope for improvement as the economic situation improves. Initiatives such as pension reform and an acceleration in privatization could also be expected under the next president as part of efforts to tackle the deficit, improve the efficiency of the state-owned companies and lower corporate taxes.
  2. We believe China’s near-term downside risk from an equity market perspective may be limited given the recent correction, whereas the upside on the positive resolution of trade issues and execution of reform initiatives could be significant. We are of the opinion that China has the policy tools to manage economic challenges and provide stimulus as it continues with structural reforms. We saw regulators implement a number of measures, including a 1% cut in banks’ reserve requirement ratio, an increase in export tax rebates and tax deductions on household income, in October. Moreover, China offers an unparalleled range of investment opportunities as rapid digitalization and growing consumption support growth for companies across different industries. Accordingly, when we look at the valuations and earnings potential of Chinese companies, underlying strength in the Chinese economy and ongoing reform efforts, we remain optimistic for China’s long-term potential.
  3. Pessimism about future global growth, the US-China trade conflict, rising US interest rates and a strengthening US dollar have led emerging market (EM) investors to switch to more defensive stocks in recent months. October saw technology-related stocks record double-digit declines, while the utilities and telecommunication services sectors fared much better. However, we think the market reaction has been excessive. We believe areas such as e-commerce, digital banking and mobile computing will likely be fundamental drivers of the global economy for years to come. EMs’ accelerating internet usage and penetration are likewise hastening opportunities for efficiencies, cost savings and ease of doing business. Promising fields such as artificial intelligence, autonomous driving and the Internet-of-Things continue to attract investment, signaling strong prospects.