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Outlook for emerging markets

Manraj Sekhon, Chief Investment Officer Franklin Templeton Emerging Markets Equity, 26/04/2021

A year has passed since the correction of March 2020 when markets first appreciated the implications of a global pandemic. The last 12 months have seen more disruption than entire decades in ordinary times. Emerging markets, led by Asia, have remained relatively resilient, having successfully adapted to or suppressed the virus. By contrast, a return to economic normality in the West is dependent almost wholly on vaccines. While we are seeing rapid progress with vaccinations in the United States and United Kingdom, Europe remains far behind amid continued lockdowns and economic stagnation.

China, too big to ignore 

“From the height of the pandemic through to the current early stage of recovery, our conviction in the growing structural advantages of emerging markets, led by key Asian economies, has only strengthened as the evidence has accumulated. Exemplifying this post-COVID-19, China is now on track to become the world’s largest economy before the end of the decade. We believe this trend (which the COVID-19-led divide in performance over the last year reinforced) will continue to have positive allocations to emerging markets, led by China, for years to come.

“It is striking that while China was the only major economy to show reasonable growth during 2020, and with an ongoing strong recovery, policymakers have set a more cautious growth target for 2021 of 6% against International Monetary Fund forecasts of 8%.1 In addition, for the first time, no longer term average growth target was set by the government. This was paired with greater emphasis on environmental and social reforms and new clean technologies—a “greening” of the economy. These measures signal the government’s broader push to a more sustainable and higher quality of growth for the long term.

“We believe we’ve passed the nadir in China–US relations, though tensions will remain elevated. After years of aggressive trade policy, the US trade deficit continues to reach all-time highs. Rather than a futile focus on trade, we believe the United States would benefit more from domestic reforms, infrastructure investment and advancing digitalization in its economy.

The adaptability of emerging markets 

“The concept of a world-leading EM company has evolved from an aspiration to a reality over the last decade— a trend reinforced during the pandemic. Taiwan, South Korea, China and India offer examples of innovative, adaptable companies capitalizing on secular tailwinds.

“Taiwanese and South Korean semiconductor firms dominate the global industry with their strong manufacturing capabilities, especially in cutting-edge semiconductor chips. Moreover, their clout has generated the cash for them to ramp up investments and widen their competitive advantages amid booming demand for chips from high-performance computing, bitcoin, auto and other businesses. By comparison, Western semiconductor firms have struggled to keep up, whether in innovation or capital expenditure.

“South Korean companies have also spearheaded the development of electric vehicle batteries, which have achieved greater penetration worldwide on the back of policy support and technology advancements. In China, biotechnology firms are developing innovative treatments for cancer and other major diseases and have won the confidence of global pharmaceutical groups in licensing these new drugs. India’s internet space, which has been under-represented in stock markets, also offers huge potential, in our view.”

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