Emerging Markets Insights

A Volatile First Quarter Delivers Gains.

Franklin Templeton Emerging Markets Equity

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Three Things We're Thinking About Today

  1. Chinese internet stocks have struggled in recent weeks amid tighter regulatory scrutiny, higher US Treasury yields and block trades linked to a troubled hedge fund. China’s increased emphasis on fair competition, consumer protection and data security within the internet industry has been a chief concern. Though regulatory news could drive near-term share-price volatility, we remain largely confident in the longer-term fundamentals of several leading internet companies. These companies have grown rapidly by offering superior user experiences and efficiencies, and we expect these strengths to continue underpinning their structural earnings power. We also think that regulators are keen to ensure the sustainable development of the internet space for all stakeholders, rather than curb its growth. We are mindful of the dispersion in valuations across the internet space, and we seek to invest in quality companies trading below what we consider to be their intrinsic worth.

  2. Brazil’s fiscal challenges have returned to the spotlight as an intensifying pandemic adds pressure on the government to ramp up already-massive spending. Concerns about the country’s mounting debt burden have weighed on its stock market and currency. Complicating matters, rising domestic inflation has narrowed the scope for monetary policy support. The central bank raised its key interest rate from a record low in March, signaling the start of a rate-hike cycle. We believe that Brazil’s economic recovery will rely heavily on the government’s ability to implement long-awaited structural reforms. Meanwhile, as a major commodity exporter, Brazil is likely to benefit from rising prices for commodities, as well as their broad appeal as an inflation hedge. We expect higher interest rates in Brazil to bode well for banks, especially market leaders that have weathered the pandemic with the help of strong capital positions and large deposit franchises.

  3. The global competitiveness of emerging market (EM) companies has been a standout feature amid market swings and pandemic worries. A widespread chip shortage has underscored the world’s reliance on Taiwanese and South Korean semiconductor firms, which have dominated the global industry with their strong manufacturing capabilities. South Korean battery makers have become key suppliers of electric vehicle (EV) batteries, supporting EVs’ growing penetration on the back of favorable policies and advancing technology. Chinese biotechnology companies working on innovative treatments for cancer and other major diseases have reaped growing success in licensing their new drugs to global pharmaceutical firms. Across industries, we have found increasing evidence of EM companies scaling the value chain, and we see durable growth characteristics in many of them.

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WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. Smaller and newer companies can be particularly sensitive to changing economic conditions. Their growth prospects are less certain than those of larger, more established companies, and they can be volatile.