Chetan Sehgal, lead portfolio manager of Templeton Emerging Markets Investment Trust (TEMIT) and senior managing director at US-based investment manager Franklin Templeton, outlines why he is optimistic about the outlook for emerging markets, and highlights some top stock picks.

Despite concerns over China’s slowing economy, Singapore-based Chetan Sehgal at Franklin Templeton is optimistic about prospects for emerging markets, compared to their developed world competitors, driven by digitalisation, high tech firms and a strong focus on renewable energy.

Both South Korea and Taiwan’s markets have come back recently, Sehgal said, with some of the world’s largest semiconductor companies found there. “The semiconductor sector was in a down cycle but the recovery has started,” he told this news service in an exclusive interview this week. Growth for South Korean electric vehicle battery makers has also accelerated in recent years.

Sehgal is also quite optimistic about India, touted as one of the world’s largest and fastest-growing economies. According to the International Monetary Fund's world economic outlook, India surpassed the UK as the world’s fifth largest economy in 2022 and is expected to overtake Japan and Germany by 2027/2028.

Sehgal recently bought into a few beaten down names in India which he said are doing well. These include PAYTM, an Indian multinational financial technology company that specialises in digital payments and financial services. They also include Policy Bazaar, an Indian insurance aggregator and financial tech firm and Zomato, an Indian food delivery company. “The country is also building up its renewables sector,” he added.

He is not alone in his views. Swiss private bank Julius Baer is optimistic about the outlook for India, Taiwan and South Korea, saying that they expect funds to keep flowing into these countries. Surendra Rosha, co-chief executive of HSBC Asia-Pacific believes that India’s acceleration as one of the world’s largest and fastest-growing economies is supported by its demographics, digitisation and an enabling policy infrastructure. See more here.  

Sehgal also highlighted how Brazil has recovered recently and he is quite optimistic about the outlook. “There was a change in government in Brazil. Once the tax reform takes place in Brazil, the outlook will be more positive,” Sehgal said. His views are shared by senior macro strategist Homin Lee at Lombard Odier whose recent investment positioning focuses on a positive outlook in Brazil, and a more nuanced one on China. See more here.

Despite concerns about China’s slowing economy and its real estate sector, in particular, Sehgal said there are still some good firms to be found there. "Growth of 4 to 5 per cent in 2023 and 2024 is also not so bad, in the context of what is happening in the rest of the world, and things are stabilising there," he added. This was echoed this week by Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management who said evidence of China's macro stabilisation mounts, but it is still fragile.

Latest figures show China’s GDP growth in the third quarter of 2023 exceeded economists’ expectations, reaching 4.9 per cent year-on-year, putting Beijing’s 5 per cent 2023 GDP growth target within reach. The quarter saw a sharp increase in retail sales, particularly for restaurants, alcohol, and cars, offsetting a drag from the property market. See more about China here.

Sehgal said awareness of ESG issues has intensified in emerging markets, with improved governance seen in many of these countries. China is also ahead in renewables, Sehgal added. It produces more than 70 per cent of all solar photovoltaic panels, half of the world’s leading electric vehicles and a third of its wind power. Chinese firm Daqo New Energy Corp (ADR), which TEMIT invests in, is one of the largest producers of polysilicone for the solar industry.  

TEMIT
Sehgal is the lead portfolio manager of TEMIT, an investment company listed on the London Stock Exchange, which provides access to the growth potential of firms from fast growing economies such as China, Mexico, Taiwan, Korea and India, with £1.94 billion ($2.36 billion) in total assets. It also embeds ESG considerations, best practice, and analytics in its investment processes. Top 10 holdings include the Taiwan Semiconductor Manufacturing Company (TSMC), Chinese tech giants Alibaba, Tencent and Baidu as well as South Korean Samsung Electronics and Brazil’s Petroleo Brasileiro.

The trust has strong exposure to Asia and is heavily overweight in IT, and slightly overweight in healthcare. It has also shown positive performance over the last five-year period, outperforming the index.

Although the trust declined in the first half of the latest financial year, it recovered in the second part of the year to end with a slightly positive annual return of 0.8 per cent. Sehgal put this down to Brazil’s recent recovery, in which they are overweight, as well as better performance in Korea and Taiwan. Asian tech giants such as TSMC and Samsung Electronics have turned the corner, so he expects improvements from here. Latest figures show TSMC posted better-than-expected earnings in the third quarter, helped by strong demand for artificial intelligence (AI) chips. Samsung is also stepping up investment in the development of advanced technologies such as artificial intelligence, robotics and 5G/6G communications.

Tencent is on the right track too. Sehgal believes that it should benefit from China’s Singles Day – the biggest shopping day in the world – which takes place on 11 November. The e-commerce giant Alibaba delivered record sales from Singles Day in 2021 with over $84 billion, up from $74 billion the previous year, despite concerns over the impact of the regulatory crackdown on technology companies. 

Angus Macpherson was recently appointed to the board as a non-executive director (NED) from October, and as chairman-elect of TEMIT. Macpherson will take on the role of chairman of the company in January 2024, working with the current chairman, Paul Manduca, who is retiring after over eight years on the board, to ensure a proper handover of responsibilities. See more here.