Strengthening Global Growth Drives Equity Gains
January 2018
Market Environment
The MSCI Emerging Markets Index generated a strong 8.34% gain in January and substantially outperformed the 4.67% return of international developed markets as measured by the MSCI World Index. Emerging markets performance was driven by a strengthening global growth backdrop. Investors, furthermore, continued to anticipate that growth in 2018 will exceed that of 2017. Commodity prices strengthened after climbing in December with Brent Crude hovering at levels not seen since late 2014 while the U.S. dollar weakened. Increasing yields for the 10-year U.S. Treasury appeared to have little, if any, impact on investor sentiment. This was the best January for fund flows since 2013 with an estimated $24.5 billion USD being directed into emerging markets.

Latin America was the best performer, driven by Brazil, Colombia and Peru. In Brazil, equity performance benefited from the unanimous vote by Federal Regional Tribunal members to uphold former President Lula da Silva’s corruption conviction. The decision could make it more difficult for him to run for president later this year. Both Peru and Colombia’s central banks cut rates in January. In addition, Colombia equity performance benefited from oil price increases and the appreciation of the country’s currency.   

Asia ex-Japan was the next best performer, although China was the only market within the category to outperform the MSCI Emerging Markets Index. China’s fourth quarter trade, industrial production, and economic growth were better than expected with GDP increasing 6.8%. Data released in January regarding the Chinese economy’s money supply was relatively weak but investors looked past that information and instead focused on the improved outlook for GDP growth. The performance of equities in India was muted, which many investors attributed to a wait and see attitude regarding the upcoming release of the country’s fiscal year 2019 budget.  

Emerging Europe, Middle East and Africa (EMEA) was the weakest region. Russia outperformed, with results likely driven by energy prices, as did Greece, which received its Eurogroup disbursement as part of a debt bailout program. The country’s debt rating was also upgraded by Standard & Poor’s. South Africa was one of the weaker equity markets as Cyril Ramaphosa was cementing his position as ANC President; he successfully pushed Eskom, the state utility, to replace its board members, an important step in improving corporate governance. Also in January, the Turkish military moved into Afrin, Syria, despite protests from the Syrian government.  

Outlook
The consensus for 2017 emerging markets earnings growth remains slightly above 22% while 2018 estimates are now above 13%. Initial results for companies that have reported fourth quarter numbers have generally been positive save companies reporting from South Korea, where local currency strength has acted as a headwind. The U.S. legislature is still having issues coalescing around policy matters, most recently reflected in a government shutdown, and the European Union continues to face well-documented uncertainties regarding Brexit talks. Italian elections in early March are also under scrutiny for a pulse on Euroscepticism and populism. There has been no change in the longer term structural support for emerging markets. The absolute price-to-earnings ratio for emerging markets has been holding steady but its discount to that of the developed world remains wide by historical standards. Return on equity continues to strengthen, having increased 20 basis points in January to 12.4%. We continue to believe a 10%-12% price-to-earnings discount is appropriate for an emerging markets to developed markets comparison. The current discount has been narrowing and was 24% at the end of January. ​

Fred Alger & Company, Incorporated is the parent company of Fred Alger Management, Inc. The views expressed are the views of Fred Alger Management, Inc. These views are subject to change at any time and should not be interpreted as a guarantee of the future performance of the markets, any security or any strategies managed by Fred Alger Management, Inc. These views should not be considered a recommendation to purchase or sell securities. Individual securities or industries/sectors mentioned, if any, should be considered in the context of an overall portfolio and therefore reference to them should not be construed as a recommendation or offer to purchase or sell securities. 

Risk Disclosure:  Investing in the stock market involves gains and losses and may not be suitable for all investors. Growth stocks tend to be more volatile than other stocks as the price of growth stocks tends to be higher in relation to their companies´ earnings and may be more sensitive to market, political and economic developments. Investing in companies of all capitalizations involves the risk that smaller issuers in which the Fund invests may have limited product lines or financial resources, or lack management depth. Special risks associated with investments in emerging country issuers include exposure to currency fluctuations, less liquidity, less developed or less efficient trading markets, lack of comprehensive company information, political instability and different auditing and legal standards. Foreign currencies are subject to risks caused by inflation, interest rates, budget deficits and low savings rates, political factors and government controls. Some of the countries where the Fund can invest may have restrictions that could limit the access to investment opportunities. The securities of issuers located in emerging markets can be more volatile and less liquid than those of issuers in more mature economies. Investing in emerging markets involves higher levels of risk, including increased currency, information, liquidity, market, political and valuation risks, and may not be suitable for all investors.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The MSCI World Index is a broad global equity benchmark that represents large and mid-cap equity performance across 23 developed markets countries. Investors cannot invest directly in any index. Index performance does not reflect the deduction for fees, expenses, or taxes.  

Fred Alger & Company, Incorporated 360 Park Avenue South, New York, NY 10010 / www.alger.com 800.992.3863 (Retail) / 800.223.3810 (Institutional) ​