internal demand in the foreground

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Summary

• China's economic reopening is progressing quickly despite a surge in COVID-19 cases in early January.
• January saw a dramatic shift in the performance of growth stocks, with the MSCI Emerging Markets Growth Index posting double-digit returns.
• Consensus expectations are for a rebound in emerging market earnings in 2023 after a sharp decline last year.
• The prospect of weaker external demand has led emerging market policymakers to turn to domestic demand, especially consumption, to support economic growth.

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Global equities started the year on solid footing, especially emerging markets. Is now a good time to join? Franklin Templeton's emerging markets equities team offers its latest perspectives.

Three things we think about today

The reopening of China and the impact on energy prices. China's economic reopening is progressing quickly despite a surge in COVID-19 cases in early January. Investor attention has recently turned to the impact of the reopening on energy prices. Unlike Europe, China is experiencing a very cold winter, with average temperatures 15ºF below the January average.1 This is increasing demand for natural gas, most of which China imports from abroad. Liquefied natural gas (LNG) prices in Asia and Europe have not yet reacted to the cold weather in China, as Europe experienced temperatures averaging 15ºF above average over the same period.2 However, if that were to change, LNG prices would LNG could rise, reigniting concerns about global inflation and limiting China's fiscal room for maneuver due to gas subsidies provided to households.

Markets pivot toward growth. January saw a dramatic shift in the performance of growth stocks, with the MSCI Emerging Markets Growth Index posting double-digit returns.3 Value stocks performed positively but lagged. This is a reversal of the 2022 performance trend in which value stocks outperformed growth stocks as rising interest rates hurt the outlook for the latter. Looking ahead, the likelihood of the trend continuing in January will likely depend on the direction of interest rates and the US dollar, among other factors.

Emerging market earnings outlook. Consensus expectations are for a rebound in emerging market profits in 2023 after a sharp decline last year.4 China's reopening and economic recovery should support profits, particularly in the voluptuous financial and consumer sectors. High interest rates typically benefit banks and we believe a recovery in the outlook for consumer technology businesses, including e-commerce, appears likely.

To view

The prospect of weaker external demand has led emerging market policymakers to turn to domestic demand, especially consumption, to support economic growth. For example, South Korea plans to offer major tax incentives to semiconductor companies and other technology companies that invest in the country. The country also plans to make it easier for foreign investors to invest in the local stock market and is providing subsidies to citizens to deal with rising prices. Thailand also approved a budget to boost tourism in the country, one of its biggest drivers of growth.

The long-term structural benefit of consumption growth in emerging markets through the expansion of the middle class and the premiumization of purchasing patterns is now more significant than ever, in our view. The opportunity for Chinese consumers is in the spotlight following the country's economic reopening. Around US$ 2.6 trillion in Chinese bank deposits have been accumulated in 2022[5] – and middle-class families are trying to leverage these savings to spend them on experiences, products and services. This is driving the opportunity for the premiumization trend at the heart of the emerging market consumer story we see.

In addition to Chinese consumption, there are other opportunities to stimulate growth in emerging markets. For example, an increase in initial public offerings in the Middle East should help boost consumption through a cascading wealth effect. We believe these uncorrelated return drivers in emerging economies represent an investment opportunity that our team's deep experience, local knowledge and bottom-up investment approach are eager to unlock.

While this is a time of uncertainty, we continue to emphasize the importance of taking a long-term view and performing due diligence when making investment decisions. With over 30 years of experience in emerging markets, we are no strangers to market uncertainty and have experience investing in highly volatile times, which we believe has helped us stay calm in the current market environment. We recognize that this period will pass, with history showing us that markets should eventually stabilize and recover.

WHAT ARE THE RISKS?

All investments involve risk, including possible loss of principal. The value of investments may go down as well as up and investors may not get back the full amount invested. Stock prices fluctuate, sometimes quickly and dramatically, due to factors affecting individual companies, specific industries or sectors, or general market conditions. Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, business practices, availability of information, limited markets and exchange rate fluctuations and policies; Investments in emerging markets involve greater risks related to the same factors. Investments in fast-growing sectors such as the technology and healthcare sectors (which have historically been volatile) may result in greater price fluctuation, especially in the short term, due to the accelerated pace of product change and development and changes in governance regulations corporate emphasizing scientific or technological advancement or regulatory approval for new drugs and medical devices. China may be subject to significant degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks specific to China, including certain legal, regulatory, political and economic risks.

Editor's note: The summary points in this article were chosen by Seeking Alpha editors.

This article was written by

Franklin Resources, Inc. (NYSE: BEN) is a global investment management organization operating as Franklin Templeton Investments. Franklin Templeton Investments provides global and domestic investment management solutions managed by its Franklin, Templeton, Mutual Series, Bissett, Fiduciary Trust, Darby, Balanced Equity Management and K2 investment teams. The San Mateo, California-based company has over 65 years of investment experience and over US$ 908 billion in assets under management as of May 31, 2014. For more information, call 1-800/DIAL BEN® or visit franklinresources.com.

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