Franklin Templeton's emerging markets equity team discusses why there are prospects for growth and investment opportunities in emerging markets.

The emerging markets equity team at investment manager Franklin Templeton sees upside potential in emerging markets as their growth prospects improve and as they focus on strategies to spur their economies.

“In China, the authorities have followed through with plans to stimulate domestic consumption within the automobile, property and leisure industries, among others,” the firm said in a statement. It believes this precedes the implementation of concrete policies to shore up the economy, which, coupled with elevated household savings, will drive the â€śpremiumization” opportunity, with consumers keen to upgrade the quality of goods they consume as their wealth rises. There is a growing middle class in many emerging countries and when they have more wealth, they want to upgrade their consumption patterns and buy a better TV or smart phone.

Nevertheless, Franklin Templeton is aware that more substantive policies and a rebound in consumer activity is a prerequisite for gains in Chinese equities to persist.

Outside China, the emerging markets equity team believes that the semiconductor industry is starting to recover, and an inflection point in terms of memory prices could occur as early as the third quarter of 2023. This presents opportunities for Taiwan and South Korea, the firm said. Domestic battery and solar energy companies in South Korea may also benefit from the US Inflation Reduction Act.  

In India, Franklin Templeton believes that there are still pockets of reasonable valuations, and there is still room for Indian equities to post further gains as earnings improve. They are also watching Brazil closely â€“ an improving inflationary environment could open the door to possible monetary easing, thus benefiting corporate earnings. 

Emerging market equities 
“Emerging market equities started the second half of 2023 on a good note, gaining ground in July and outpacing their developed market counterparts. Encouraging US macroeconomic data and enhanced clarity on China’s plans to shore up growth pushed markets higher,” the firm said. For the month, the MSCI Emerging Markets Index advanced 6.29 per cent, while the MSCI World Index gained 3.39 per cent.  

“Emerging Asian equities advanced as all countries managed to eke out gains. China was the best performer as authorities rolled out plans to revive domestic consumption, spur private investment and support the real estate market,” the firm continued. “Chinese technology stocks also rallied after signals that the years-long regulatory crackdown has ended, with authorities now pledging more support for the sector,” the firm said.

“India outperformed on the back of strong corporate earnings. Stocks in South Korea and Taiwan also managed to rise, but gains were capped after two notable heavyweights chipmakers – Samsung Electronics and Taiwan Semiconductor Manufacturing Company – reported disappointing earnings results for the most recent quarter,” Franklin Templeton said. Investors are expecting an improvement in the outlook for semiconductor demand to lead a recovery in the second half of 2023. These expectations are providing support to the MSCI EM Index, which gained 6.3 per cent in July 2023. 

According to the firm, emerging Europe, Middle East and Africa was the best performing region in the most recent quarter. “Turkish equities led gains over hopes of a gradual policy normalisation. The South African rand strengthened against the US dollar, reaching a three-month high. South Africa’s central bank also left interest rates unchanged on improving economic conditions,” the firm said.

“In the Middle Eastern region, central banks mirrored the US Federal Reserve and raised interest rates. Qatar also reported new long-term contracts with Asian buyers for gas, while the United Arab Emirates announced plans to double the contribution from its industrial sector to its gross domestic product,” Franklin Templeton continued.  All major equity benchmarks in the Latin American region also posted gains, with macroeconomic data taking centre stage in the region, the firm concluded.