Fundamentals Drive Emerging Market Performances in April

Franklin Templeton’s Emerging Markets Equity team walks through events moving emerging markets in April and discusses the three things the team is thinking about today. The team believes the current market environment provides an attractive entry point for investors, particularly in the small-cap stock space.

Three Things We’re Thinking About Today

  1. A higher-than-expected first-quarter economic growth rate of 6.4% and indications of a shift in focus to structural reform by senior leaders at the Politburo meeting raised market concerns that the Chinese government could refrain from implementing further stimulus measures. However, we do not expect to see any policy tightening in the near term. We believe first-quarter growth benefited from earlier tax cuts, which boosted retail consumption and property sales. The US Federal Reserve’s (Fed) dovish stance also helped reduce pressure on capital outflows, resulting in a more benign monetary environment with stronger loan growth in the banking system. Going forward, however, liquidity remains a concern with a significant amount of bonds due for repayment in the second half of the year. An increase in inflation, a change in the Fed’s policy or an unexpected turn in US-China trade talks could also have an impact. Further, the industrial and manufacturing segments of the economy remain challenging. Thus, we believe the government could continue to implement selective fiscal measures to support the economy.
  1. South Africa was one of the best-performing markets in April, ahead of general elections in May. We expect the incumbent, market-friendly African National Congress (ANC) party to win a parliamentary majority. While we have seen some progress in reforms, a strong mandate for President Cyril Ramaphosa could allow the government to accelerate the implementation of much-needed reforms as well as stimulate the domestic economy. The state electricity utility, however, has worrying debt levels, raising the possibility that there could be further state help which has spurred concerns of a credit downgrade. Moody’s, the last of the rating agencies to issue an investment-grade rating, delayed its rating announcement to the second half of the year. While easing short-term worries, the announcement needs to be monitored as any downgrade could significantly impact the country’s ability to service its debt. Against this background, our focus has been on retail companies that offer attractive valuations and businesses with more international exposure.
  1. One of the world’s largest one-day elections was held in Indonesia during April, where the country’s presidential, parliamentary and regional elections all took place on the same day. While official results are expected in May, early results indicate a comfortable victory for President Joko Widodo and his Indonesian Democratic Party of Struggle. We have seen Indonesian equities run up in the last six months and expect the market to continue to do well on high expectations from the new government, improving macroeconomic indicators including consumption, current account balance and inflation as well as a more accommodative global monetary policy. We expect the government to continue to focus on infrastructure development and expanding social welfare including efforts to promote education, boost investment and implement key reforms. We continue to favor companies geared to benefit from the country’s superior demographics and rising consumerism.