Emerging Markets: Views from the Experts
1. NEW TARIFFS
Market sentiment turned negative in May, when concerns emerged of an escalation in the US-China trade war.
Undoubtedly, the increase in tariffs will impact many Chinese producers, with some companies already shifting manufacturing to other countries. However, China is becoming less dependent on trade—at present about a third of its gross domestic product comes from foreign trade compared to almost 65% more than a decade ago.
Instead, the key underlying drivers of China’s growth have been shifting toward innovation, technology and consumption. If China’s rebalancing efforts result in an economy that is more sustainable, it would almost certainly continue to be a structural growth driver for emerging markets (EMs) in the decades to come.
2. MSCI REBALANCING
MSCI’s semi-annual rebalancing, which was accompanied by the inclusion of Saudi Arabia in the MSCI Emerging Markets Index and the reclassification of Argentina from frontier market (FM) to EM status, took place on 28 May.
MSCI also increased the inclusion factor of China A-shares to 10% from 5%, doubling its index weighting to just under 2%.
MSCI’s decision to upgrade Saudi Arabia to emerging markets status puts it firmly on the radar of international investors and is a positive step for the Middle East region’s transition into mainstream EM investment.
Russia remains one of the most undervalued markets globally, despite very strong performance over the past three years. Many international investors have avoided this market because of economic sanctions against the country.
Russia’s fairly self-sustained economy has limited the impact of sanctions. While the economy has proven to be resilient, many companies have taken steps to adapt and flourish in the current environment. In some cases, restricted access to Western technology has spurred Russian companies to invest in building their own ecosystems, which contributes to more sustainable growth.
Moreover, corporate governance in many Russian companies has improved significantly. For example, many companies have increased dividend payouts and undertaken share buybacks to improve shareholder value.
This outlook is part of a series being sponsored by Templeton Emerging Markets Investment Trust. For more information on the trust, visit here