Emerging Markets Race Ahead in January

Emerging market equities were off to a strong start overall in 2019, rebounding from a 2018 downturn. Manraj Sekhon, CIO of Franklin Templeton Emerging Markets Equity, and Chetan Sehgal, senior managing director and director of portfolio management, outline what drove market moves in January and why they and the team think confidence in emerging markets should continue to improve.

Three Things We’re Thinking About Today

    1. As widely expected, the US Federal Reserve (Fed) left its key interest rate unchanged at its January meeting. A change in the Fed’s language and tone from its December meeting, indicating patience, signaled a likely pause or even halt in rate hikes. Flexibility in balance sheet normalization was also indicated. Market participants now widely expect one rate hike for 2019, down from two last month, leading market sentiment toward emerging-market (EM) equities and currencies to improve further. Portfolio flows into EMs have also turned positive in recent months, driven by renewed optimism in the asset class. EMs as a whole continue to demonstrate strong economic potential, with floating foreign exchange regimes, current account surpluses and more favorable debt levels than their developed-market (DM) peers.
    2. Progress in US-China trade talks, a stronger Chinese renminbi, implementation of supportive policies on the monetary and fiscal fronts as well as stimulus policies aimed at boosting consumption and tourism drove sentiment in Chinese equities in January. While gross domestic product (GDP) growth in China has eased recently, we do not expect a hard landing as long as the government maintains adequate liquidity and close control over the capital account. The economy continued to grow at a robust rate of over 6%, making the country one of the fastest growing major economies in the world. Meanwhile, a shift toward innovation, technology and consumption as primary drivers of growth could support sustainability over the long term. In the interim, however, we maintain a cautious view as a prolonged trade US-China trade dispute could lead to significant volatility. We will continue to monitor the situation and look for attractive investment opportunities in sectors related to health care, consumption and manufacturing upgrades, which over the long term, are less directly impacted by tariff regime changes.