{"id":2457,"date":"2018-06-18T17:10:32","date_gmt":"2018-06-18T17:10:32","guid":{"rendered":"https:\/\/emintelligence.com\/?p=2457"},"modified":"2023-09-20T17:29:40","modified_gmt":"2023-09-20T17:29:40","slug":"emerging-markets-experience-healthy-correction-may","status":"publish","type":"post","link":"https:\/\/emintelligence.com\/emerging-markets\/emerging-markets-experience-healthy-correction-may.html","title":{"rendered":"Emerging Markets Experience a Healthy Correction in May"},"content":{"rendered":"
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Franklin Templeton Emerging Markets Equity Chief Investment Officer Manraj Sekhon and Director of Portfolio Management Chetan Sehgal present an overview of emerging-market developments in May, including some events, milestones and data points.<\/p>\n<\/div>\n

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Three Things We\u2019re Thinking About Today<\/strong><\/h2>\n
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  1. More than 230 China A-share companies were added to the MSCI Emerging Markets (EM) Index on June 1. Initially, the companies will account for only 0.4% of the index, but this will rise to 0.8% in September, when the inclusion rate is raised to 5% of the planned total. If and when all China A-shares are included in the index (100% inclusion rate), it would bring China\u2019s total weighting to over 40% of the MSCI Emerging Markets Index.1<\/a><\/sup>\u00a0The inclusion of A-shares, in addition to improving liquidity, could prompt increased company disclosure and better market accessibility, thereby enabling access to a wider range of companies in structural growth sectors such as pharmaceuticals, consumer and technology.<\/li>\n
  2. With rising US interest rates, we have seen the US dollar strengthen, which has traditionally been a headwind for emerging markets. However, the effects today are likely different than previous episodes of dollar strength, as today, most EM currencies have floating foreign exchange regimes, emerging markets in aggregate run a current account surplus, and intra- and inter-regional trade have taken on greater importance within the EM world. The direction of the US dollar itself is far from certain\u2014should the US government aggressively pursue policies to boost exports and manufacturing, it may be inclined to promote a weaker US dollar.<\/li>\n
  3. Oil prices have been on a generally upward trend this year so far, reaching a multi-year high in May. A host of factors, including higher demand, shrinking global oil inventories and increased geopolitical risks have driven the surge in oil prices. However, recent reports that Organization of the Petroleum Exporting Countries (OPEC) and its allies may increase production led oil prices to decline slightly at the end of May. While we remain constructive on the oil price over the medium to long term, we recognize the elevated earnings risk and focus on companies with low production costs and strong balance sheets.<\/li>\n<\/ol>\n

    Outlook<\/strong><\/h2>\n

    We continue to have faith in emerging markets and believe they will continue to grow at a strong pace, fueled by robust trade and solid commodity prices. The rapid adaptation of information technology in emerging markets such as India and China have further propelled their strong growth. We continue to see improvement in the earnings power and cash flow of many EM companies. The impact of rising US interest rates, China\u2019s economic restructuring, stock valuations, market volatility and political events all play a role in our analysis of the development of emerging markets from where we are today. What we have seen so far in 2018 is a reminder that markets can be volatile, and we expect continued volatility this year.<\/p>\n

    Nevertheless, we remain optimistic about the opportunities that we see in \u201cnew economy\u201d sectors related to technology and consumption. EM companies have not only taken part in the technological revolution, but are also at the forefront, becoming global innovators in areas such as e-commerce, mobile banking, robotics and autonomous vehicles. This development has created investment opportunities in a broad array of companies, ranging from internet firms to chip makers, hardware manufacturers and more. Rising wealth in emerging markets is another secular driver and we expect it to continue lifting demand for goods and services. Financials are also interesting to us, as improving macroeconomics in emerging markets create a potential tailwind for banks.<\/p>\n

    Our investment approach in emerging markets is driven by fundamental research and rigorous stock selection, which emphasizes companies with sustainable earnings power and reasonable valuations. Geopolitical uncertainty may trigger bouts of market volatility, but these can also be opportunities for long-term investors to acquire shares in well-run companies at reasonable valuations.<\/p>\n

    Emerging Markets Key Trends and Developments<\/strong><\/h2>\n

    EM equities declined in May, while developed-market stocks finished moderately higher. Renewed global trade tensions, economic and political concerns, and a stronger US dollar contributed to investors\u2019 shift away from emerging markets. The MSCI Emerging Markets Index declined 3.5% over the month, compared with a 0.7% gain in the MSCI World Index, both in US dollars.2<\/a><\/sup><\/p>\n

    The Most Important Moves in Emerging Markets This Month<\/strong><\/h2>\n