Recent jitters in emerging markets brought on by months of US-China trade tensions and other uncertainties could represent a buying opportunity for investors with a medium- to long-term horizon, according to Chetan Sehgal, manager of the Templeton Emerging Markets Investment Trust.
Sehgal said investors shouldn’t allow the trade spat or other short-term issues to cloud their long-term view of the asset class, adding that he sees plenty of positive fundamentals that support his optimism.
“We would also note that while 2018 was no doubt a disappointing year for many investors, the prior two years saw very strong returns that outpaced developed markets overall,” he added.
Here are three considerations he thinks investors are missing when it comes to emerging markets.
1. “Crisis” valuations don’t reflect underlying resilience
Geopolitical tensions between the US and China have contributed to a decline in emerging market stocks, driving valuations to near crisis levels. However, Sehgal said this may have opened up a buying opportunity, as most emerging market economies are not in crisis situations.
“We think the pullback we’ve seen in emerging market equities in recent months presents some attractive medium- to long-term opportunities,” he continued.
“While economic growth overall was perhaps not as strong as had been expected at the start of the year, in 2018 emerging markets still outpaced developed markets.
“This trend is expected to continue in 2019, with the International Monetary Fund forecasting 2019 GDP growth in emerging markets at 4.5 per cent versus 2 per cent in developed markets.”
There have been fears that rising interest rates in the US could lead to a repeat of the Asian financial crisis in the late-1990s – many emerging economies borrow in dollars, meaning this debt becomes harder to service when the currency rises.
However, Sehgal said two decades of mass financial reforms have transformed Asian economies in particular and emerging market debt-to-GDP levels are now relatively low compared with developed countries.
“We believe this solid growth outlook and the other positive fundamental factors we see in emerging markets indicate equities have the potential to rebound should some of the recent market uncertainty subside,” he explained.
2. A supportive corporate environment
Although emerging market currencies weakened last year, Sehgal noted corporate earnings growth in US dollar terms was positive and looks sustainable. He said this means cheaper valuations could attract long-term value-oriented investors towards companies that are currently trading at a discount.
“Against this brighter backdrop, we’ve seen an improvement in corporate governance, with better transparency between companies’ stakeholders and decision makers,” the manager continued.
“We think this creates a supportive environment for shareholders, whether that’s in technology companies or niche small-capitalisation consumer businesses in emerging markets.”
3. Growth driven by consumerism and technology
Sehgal said that the headwinds seen in emerging markets last year obscured the bigger picture: that many companies in the sector are now world leaders in the areas of financials, technology and the production of many consumer goods.
He added that patent applications in emerging markets have now overtaken those in Japan and the US, with this growth showing no sign of abating.
“We think this reflects the growing innovations we’ve seen coming out of emerging market companies – from mobile payment and lending systems to driverless cars and healthcare services,” he explained.
“Emerging markets in many cases have been able to adopt new technologies at a fast rate because there are no legacy systems that need to be replaced or integrated first.
“We are confident technology will remain a primary driver in emerging markets, whether manifested through world-leading semiconductor manufacturing, e-commerce or other areas. Despite some recent corrections we’ve seen in some technology-orientated emerging market companies, we still believe many of them have sustainable earnings potential.”
Sehgal added that consumerism should help drive growth across many emerging market regions. Growing middle-class populations and increasing affluence – what he calls the “premiumisation” of the market – continue to spur demand for high-end products.
“In our view, companies with superior products should see sustainable growth in the years to come,” he finished.
Data from FE Analytics shows Templeton Emerging Markets Investment Trust is down 7.9 per cent since Sehgal was named lead manager of the the trust one year ago, slightly better than losses of 8.37 per cent from its IT Global Emerging Markets sector and 9.01 per cent from its MSCI Emerging Markets benchmark.
Performance of trust vs sector and index under manager tenure
Source: FE Analytics
Early last year, analysts at Winterflood Investment Trusts said that while they had some concerns about the departure of former manager Carlos Hardenberg, Sehgal was part of the same senior management team that considered the ideas generated by the firm’s analysts before making investment decisions. Sehgal has been a named manager on the trust for three years.
“Sehgal does clearly represent continuity and has been part of Templeton Emerging Markets’ impressive recovery story in recent years,” they said.
“We believe that Templeton Emerging Markets can continue to benefit from the resources of one of the pre-eminent teams in emerging market equities.”
The trust is trading at a discount of 9.78 per cent to net asset value (NAV) compared with 12.44 and 12.84 per cent from its one- and three-year averages.
It has ongoing charges of 1.12 per cent and is not currently geared.