Mark Mobius: The booming prospects for emerging markets

Mark Mobius 480

While prospects at the start of the year seemed rather dour for emerging markets, resilience has been the story for the sector ever since.

Global stockmarkets continued to rise during Q3 amid generally positive macro data and accommodative monetary policy across many regions. Broadly, both emerging and developed equity markets advanced, with the former generally outperforming the latter, as improving fundamentals and higher yields drove fund flows into them. The MSCI Emerging Markets index returned 9.2 per cent, compared to the 5 per cent gain in the MCSI World index (both in US dollar terms).

Delving into the outlook for specific regions, we have seen markets in Asia continue to impress, making it the strongest performing emerging market region for the third quarter. The Chinese, Taiwanese, Hong Kong and South Korean markets all produced double-digit returns, while Indonesia, Thailand and India also recorded gains. Hong Kong has recently benefited from net flows from its share-trading link with Shanghai and strength in the gaming and property sectors, while China’s markets continue to benefit from improving macro figures.

Latin America has also produced some star performers recently. Brazil, in particular, stands out as investors cheered the impeachment of Dilma Rousseff and welcomed Michel Temer as its official president.

Elsewhere, the Hungarian market has benefited from low interest rates and an acceleration in GDP growth in Q2. Meanwhile, a rebound in oil prices in the last two months of the quarter, an interest rate cut and better-than-expected Q2 economic growth data has also supported Russian equities.

We have seen global central banks remain highly accommodative, with some even pushing interest rates negative. In the short term, the search for yield is resulting in more money flowing into the higher-yielding emerging equity and bond markets, resulting in their recent outperformance. That is certainly not something we would complain too much about. However, we must be mindful of the macro developments engendered by unconventional central bank policies, which could have unforeseen consequences for many investors.

While the year is not yet over, we see brighter prospects for investors in emerging markets compared with 2015, and the long-term performance of equities compares favourably to that of developed markets.

A rebound in commodity prices this year led by oil has further shifted investor sentiment in favour of emerging market equities. At the same time, many emerging markets have moved to lessen their dependence on commodities as drivers of growth and have diversified their economies into areas such as information technology and other service-based sectors.

In addition, many are making meaningful progress on structural reforms to stimulate growth and their respective share markets. For example, India recently passed a national bankruptcy law and a goods-and-services tax bill, and has relaxed foreign direct investment rules to further stimulate economic growth.

“While the year is not yet over, we see brighter prospects for investors in emerging markets compared with 2015, and the long-term performance of equities compares favourably to that of developed markets.”

Sentiment towards emerging markets continues to become more positive as perception towards the asset class improves. A rebound in emerging market currencies, easing concerns about a hard landing in China, attractive valuations and robust economic fundamentals in many countries are some of the factors that continue to support their performance.

GDP growth in many countries has been slowly improving, with Brazil and Russia likely to see the biggest relative improvements over the next few years. As a group, the International Monetary Fund expects emerging markets to grow 4.1 per cent in 2016, accelerating to 4.6 per cent in 2017. In comparison, developed markets are expected to expand 1.8 per cent in 2016, as well as 2017.

While they remain sensitive to macro indicators and global monetary policy -which means volatility is likely to persist for some time – emerging equity markets appear to have begun to readjust. We see signs confidence is returning to and believe it is likely to continue.

Mark Mobius is executive chairman of Templeton Emerging Markets Group