A fter a strong 2017, the recent market volatility has made many investors reconsider their allocation to Emerging Markets. In contrast, Franklin Templeton embraces volatility as an opportunity to find hidden value. The Templeton Emerging Markets Group (TEMG) shared with us why they believe the long-term investment case remains solid for Emerging Markets and explained how their disciplined investment process has led to long-term outperformance.
Investment Success in the Emerging Markets
TEMG has always believed that successful investing requires a long-term but flexible investment approach driven by fundamental and bottom-up research throughout market cycles. The team adopts a holistic approach to finding value –– to identify undervalued or out-of-favor companies with sustainable earnings growth. Their portfolio is constructed from pure bottom-up stock picking, with country and sector weightings an outcome of the process.
Seeing Opportunities Across Asia
TEMG’s portfolios are heavily invested in China, South Korea, and Taiwan. The team continues to find abundant value opportunities across Asia, one of the fastest growing regions in the world. Furthermore, the team finds many Asian stock markets are riding on strong economic and earnings growth, as well as more robust consumer trends, driven by reforms and business friendly government policies. Taking India as an example, various reforms have been put in place, including the GST bill, in order to open up business opportunities for corporates. Besides, it is exciting to see a new generation of innovative companies in Asia shifting into technology, higher value-added goods, and services. The team believes that this is a good complement to existing business models that tend to focus on infrastructure, telecommunications, traditional banking or commodities.
Overall, TEMG thinks that the Emerging Markets’ consumption story remains intact, underpinned by strong growth and trade, favorable demographics, technological transformation and the consumption upgrade demand from the rising middle class. As household income continues to grow in these markets, the demand for goods and services is set to boom. Therefore, their portfolio is tilted towards direct and indirect consumer plays, all of which are able to benefit from the untapped consumer spending potential of the young and growing population.
Amid the changing socio-economic status of emerging economies and the consumption upgrade cycle, TEMG believes that their prudent, bottom-up stock selection based on fundamental research enables them to generate alpha over the long term. They adhere to their investment process consistently throughout different market conditions, yet their research process is dynamic –– analysts adjust their underlying financial assumptions and long-term earnings forecasts to appropriately reflect the latest market, industry or company specific developments.
2018 Risk Outlook
Apart from political events, the team warns that investors should keep a close eye on higher bond yields, rising market volatility, and China’s resolve to deleverage, all of which could have negative impacts on the markets.
Regardless of the macro environment, to mitigate risk, TEMG remains bottom-up, fundamentally-driven and valuation-focused. They, therefore, see dips in the markets as opportunities to buy stocks cheaply, and they pay attention to valuations and long-term earnings growth prospects in order to avoid buying or holding expensive stocks. BM