Three things we are thinking about today:
- China–Signs of a rebound: Purchasing manager indexes in China rebounded in March, with the Caixin/S&P Global index reaching its highest level in over a year. Drivers of the rebound included rising raw material purchases and inventories. Chinese industrial companies may be restocking ahead of the government’s planned 20% increase in special bond issuance this year to US$680 billion. The increase in special bond issuance is linked to the official gross domestic product (GDP) growth target of “around 5%” in 2024.
- India confirmation of election date: India will go to the polls on April 19, with voting in the general election continuing over six weeks. The incumbent Bharatiya Janata Party (BJP), led by Prime Minister Narendra Modi, is expected to win comfortably. Investors are focusing on whether the party and its partners can win 358 seats—or a two-thirds majority in the lower house—which will enable them to make constitutional changes.
- Emerging market valuations: The price-to-earnings discount for emerging markets (EMs) relative to developed market (DM) peers was 35% in March. Historically, EMs trade at a valuation discount to DMs; however, the gap has widened over the past 12 months on a narrowing of the GDP growth differential and higher DM earnings growth. Looking ahead, the GDP growth differential may widen in favor of EMs. In combination with higher earnings growth this year and next, we think these factors could act as a catalyst for investors to reassess their allocations to emerging markets, potentially leading to increased fund inflows and improved equity market performance.
Outlook
A recent survey of the Templeton Global Investments’ portfolio management team highlighted expectations for higher EM earnings growth for 2024, compared with the prior year. This could help to drive performance for EMs, complementing the growth opportunities from long-term investment themes.
India’s projected mid- to high-teens earnings growth stands out, with the capital expenditure cycle lending support. In other EMs, productivity improvements related to artificial intelligence (AI) could, over time, boost corporate earnings power. Our team is starting to see signs of growth in China, especially among companies focused on the domestic economy. They see opportunities in the industrials sector, driven by high levels of investment and innovation.
However, we are cognizant that inflection points can happen quickly. This could in turn weigh on earnings. This occurred in 2023, when the solar energy and electric vehicle supply chains in North Asia saw overcapacity and a slowdown in demand, respectively. As such, while keeping a focus on the long term, we also remain alert for any potential changes in demand trends.
We believe our long-standing local and global presence provides us with a well-rounded perspective to analyze tailwinds and headwinds in our markets. As active investors, we believe that our focus on long-term earnings power can help us navigate short-term volatility, while bearing in mind the lessons learned.
Market review: First quarter 2024
EM equities rose during the quarter but lagged their DM counterparts. Equity markets were upbeat after the US Federal Reserve (US Fed) kept its policy rate steady. The US Fed also indicated that expectations for three rate cuts in 2024 remains. For the quarter, the MSCI EM Index returned 2.44% while the MSCI World Index advanced by 9.01%.1
Equities within most emerging Asian countries rose. The markets of South Korea and Taiwan benefitted from a rally in semiconductor chip stocks. Optimistic growth projections—helped by AI-driven demand and better-than-expected sales—supported share prices further. A turnaround in the technology sector drove a recovery in exports for these two countries. Taiwan’s central bank went against global trends and raised benchmark interest rates in a surprise move. In India, improving macroeconomic data led equities to outperform. However, profit-taking and increased regulatory oversight of non-bank finance companies caused selected stocks to decline and curbed gains.
Stocks in China fell. Concerns over macroeconomic conditions and a muted response to the targets and policies from the National People’s Congress weighed on sentiment. Geopolitical tensions also pressured the share prices of several companies. This offset support from efforts to stabilize the equity market and regulatory intervention. Better-than-expected activity data released toward the end of the period also helped to limit losses.
The emerging Europe, Middle East and Africa region also tracked higher. Higher oil prices aided the performance of Middle Eastern equity markets. Saudi Arabia’s state-owned oil company increased its dividends, which drove its share price higher. This boosted the performance of the country’s equity market further. While Egyptian equities rose after the country clinched deals with the United Arab Emirates and the International Monetary Fund, it was still a laggard for the period.
Equities in Latin America fell. Country heavyweights Brazil and Mexico stood out. Larger stocks in Brazil’s equity market were a drag—its state-run oil and gas producer fell after dividends disappointed. An iron-ore producer in Brazil saw its share price decline alongside iron ore prices. This added to pressures from an unfavorable court ruling and uncertainties over its succession plan. Interest-rate decisions in these two countries converged, with both central banks cutting rates as inflationary pressures eased.
Index Definitions
The MSCI Emerging Markets Index is a free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of global emerging markets. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator of future results.
The MSCI All Country World Index is a free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of global developed and emerging markets. MSCI Emerging Markets Index is a free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of global emerging markets. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator of future results.
The MSCI EM Latin America Index captures large- and mid-cap representation across five emerging markets (EM) countries in Latin America. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator of future results.
The MSCI Emerging Markets EMEA Index captures large- and mid-cap representation across 11 emerging markets (EM) countries in Europe, the Middle East and Africa (EMEA). Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator of future results.
The MSCI EM Asia ex Japan Index captures large- and mid-cap representation across two of three developed markets (DM) countries (excluding Japan) and eight emerging markets (EM) countries. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator of future results.
The MSCI China Index captures large- and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator of future results.
The MSCI Emerging Markets ex-China Index captures large and mid cap representation across 23 of the 24 Emerging Markets (EM) countries* excluding China. With 672 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. Past performance is not an indicator of future results.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.
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1. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.