TEMG: Asia still thriving with investment opportunities
We think right now Asia is the most exciting region in emerging markets. It offers a range of opportunities, from China, South Korea, India and Taiwan to countries such as Indonesia. Carlos Hardenberg, TEMG executive vice president and managing director/portfolio manager, and Chetan Sehgal, executive vice president, director of Global Emerging Markets/ Small Cap Strategies
KUCHING: Franklin Templeton Investment’s Templeton Emerging Group (TEMG) believes that Asia remains ‘a very exciting’ investment region in the emerging markets, offering a range of investment opportunities.
In a press statement, TEMG pointed out that the recovery in emerging markets, which has been underway since 2016, is not slowing down anytime soon, and the group is confident that Asia, Latin America, and Africa will offer investors ‘the opportunities of tomorrow’.
In a joint remark, TEMG executive vice president and managing director/ portfolio manager Carlos Hardenberg, and executive vice president, director of Global Emerging Markets/ Small Cap Strategies Chetan Sehgal said, “We think right now Asia is the most exciting region in emerging markets.
“Itoffersarangeof opportunities, from China, South Korea, India and Taiwan to countries such as Indonesia.
“As fundamental stock pickers, we are equally excited about individual opportunities in other parts of the world, in places like Russia, which has recently fallen out of favor.
“In such situations, we are finding companies we regard as extremely well run, growing at a fast pace, and providing exposure to key themes such as economic growth, demographic changes, and local consumer trends.
“Indeed, the re l a t ive ‘unpopularity’ of these markets means that we have been able to add exposure to fundamentally strong companies at prices we considered quite attractive.”
They added, “Similarly, we’re finding opportunities in Latin America. Brazil has just emerged from a prolonged recession and faced several challenges, including high unemployment and huge corruption scandals, but we are generally positive on the possibilities within that market given the new emphasis on reform efforts.
“We are also finding appealing investments in other countries in Latin America, most notably Argentina.
“Last but not least, we are very excited about frontier markets around the world, not only in Africa but also in Asia and Latin America.
“We view these markets as offering the opportunities of tomorrow, ideally for longer-term investors with a time horizon of over five years.”
Meanwhile, they noted that the aggregate sector weights of energy and materials in the MSCI Emerging Markets Index have fallen from approximately 40 per cent around a decade ago to about 14 per cent as of October 2017, with the weights of information technology (IT) and consumer companies steadily increasing.
“IT now commands the highest weight in the index at around 30 per cent, a result both of recent outperformance versus the overall index, as well as the rise of a number of large IT players, not only in South Korea and Taiwan, but also in China.
“Moreover, emerging markets IT companies are no longer merely supporting developed- market products by making components or licensed devices; they are actually developing branded technology products that are exported to the rest of the world, gaining traction and market share.
“Technology in general is leading to greater efficiencies and innovation, enabling a company to grow faster, gain a competitive advantage and build a fairly large market share that protects the business for a long time.
“Opportunities in the IT sector can take many forms, such as e-commerce business models, as seen in Latin America; companies that develop automobile-related IT components out of Taiwan or South Korea; or digital banks in Asia and Africa,” they explained.
TEMG also favoured consumerrelated sectors.
“We believe the demand for goods and services is set to skyrocket as EM household income continues to grow.
“Vietnam alone has seen gross domestic product ( GDP) per capita rise from US$500 to US$3000 in about eight to nine years, which translates into dramatically higher spending power, and these consumers are looking for goods and services.
“Fromaninvestmentperspective, we are especially interested in companies that cater to this need with local brands and locally produced goods,” they said.
Looking at valuations overall, TEMG observed that earnings of many emerging markets’ companies are gradually improving, in terms of profitability, margins and return on equity, after these variables came under pressure recently.
“We see better visibility in emerging markets companies’ earnings forecasts and believe that earnings still have a lot of room to recover. Putting all these factors together, we consider the valuations of emerging markets companies as of late 2017 to still be very attractive,” Carlos and Chetan said.
However, they warned that there might be volatility ahead, particularly as investment flows can often reflect ever-changing attitudes to perceived risk, with inflows as investors move ‘risk-on’ and outflows as they move ‘riskoff’ in outlook.
“Less mature markets tend to be heavily sentiment-driven, and so share prices in those markets could quickly reflect any skepticism.
“Even so, major global investors have a lower proportion of exposure to the asset class, below what we would expect given the proportion of global GDP and market capitalisation that emerging markets represent, and that could support continued inflows,” they pointed out.