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

1.  The global growth scare amid the war in Ukraine and significantly higher US interest rates over the next 12 months, combined with the impact of rising input costs, imply slower future profit growth. Consensus expectations for the MSCI World Index is for earnings growth to decline to 8% in 2023, from a forecasted 13% in 2022. However, the risk is skewed toward further downward revisions to earnings in 2023. In contrast, emerging markets (as measured by the MSCI Emerging Markets Index) are expected to witness a recovery in earnings growth to 10% in 2023 from an expected -1% in 2022,2 driven primarily by a recovery in the Central and Eastern Europe Middle East and Africa (CEEMEA) region as well as China and India. While there are risks to earnings in both these markets, decision makers in China are easing policy to offset risks to growth.

2. Global automakers are continuing to grapple with resource constraints and supply chain challenges, with automotive semiconductor chips remaining in short supply. Access to nickel for the production of lithium batteries is viewed as the next big challenge as automobile makers ramp up EV production and demand for lithium batteries increase. In Asia, the focus is on Indonesia, which has one of the world’s biggest nickel deposits. With an eye on creating an integrated nickel industry, as opposed to one focused solely on mining, Indonesia recently announced that it had secured a combined $15 billion investment from a South Korean and Chinese battery manufacturer for an integrated EV battery project.

3. While the rest of the world continues to reopen post-Covid-19, China’s ‘zero-Covid’ policy implies the country is stuck in a cycle of spiking cases and lockdowns. This is starting to create demand destruction as well as supply chain tightness and adding to global inflationary pressures. Covid-19 aside, Chinese policymakers have committed to further policy loosening to support a slowing economy. Regulators will likely also reduce the pace of reforms.

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