Three things the Franklin Templeton Emerging Markets Equity team are thinking about today

1. Emerging markets (EMs) outpaced developed markets in 2020, with the gap widening further in January, reversing a period of underperformance and fund outflows. This is reflective of the fact that many companies, particularly those in East Asia, successfully managed their business operations during the pandemic and should emerge from the crisis in a stronger competitive position. Nonetheless, EM equities continue to trade at a discount to developed markets. An improvement in earnings visibility as economic recovery becomes more widespread across EMs should enable a further broadening of market performance. Corporate earnings are also expected to see a sharp rebound in 2021 from the low base in 2020.

2. In many EMs, a central new reality is the rise of domestic demand as a driver of growth. By contrast, Taiwan’s companies derive over 70% of revenues from abroad. However, these exports are not low-quality products, nor are they commodities subject to cyclical fluctuations in demand and pricing, characteristics many have historically associated with EMs. Taiwan’s highly educated workforce has been the backbone of its steady ascent up the value chain in manufacturing; it is now an exporter of technology components and essential semiconductor chips that constitute the computing power behind modern technologies. The importance of these products in the world economy is only increasing, which is a powerful tailwind for Taiwan’s economy.

3. ͏͏͏Often overlooked, we believe that the frontier markets (FMs) asset class continues to exhibit significant long-term growth potential. The structural opportunity is akin to EMs 30 years ago, except that the development curve is likely to be more rapid due to technology availability. Over the long term, we believe domestic dynamics that are geared toward favorable demographics and under-penetrated sector stories will drive FMs. In contrast to developed markets, most FMs have high population growth rates and an expanding working population. In addition, the pace of urbanization in FMs, when coupled with lower penetration of basic services, creates potential opportunities to tap into a growing domestic consumer market. Rising sovereign debt levels and higher unemployment, however, are among the key challenges that policymakers in FMs would have to monitor and address, in our view.

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