Emerging Markets: Volatility Persists but Valuations Remain Attractive
October​ 2018
Market Environment​

The MSCI Emerging Markets Index declined 8.70% during October and underperformed the -7.32% return of developed markets as measured by the MSCI World Index. Brazil and Qatar were the only emerging markets (EM) countries to produce gains while 10 EM countries experienced equity market declines of 10% or more. The 10-year U.S. Treasury yield hit its highest mark since 2011 on rising interest rate expectations in the U.S. Uncertainties about global trade persisted, continuing to act as an overhang on global markets. Most risk assets, including oil and other commodities, experienced price declines.

Latin America was the best performing region, led by Brazil as Jair Bolsonaro, after leading in polling for the second round presidential election all month, won by a convincing margin. His acceptance speech focused on his economic agenda as well as law and order and was well received by markets. In Mexico, on the other hand, a decision by President-elect Lopez Obrador (AMLO) to conduct a national consultation on the new Mexico City airport and as a result cancel the airport despite minimal voter turnout (less than 1% of Mexicans voted) spooked investors. Investors deemed this decision poor because the new airport is already partially constructed and AMLO indicated he would use this consultation method again under his presidency, injecting uncertainty into the continuation of reform undertaken by prior administrations.

Emerging Europe, the Middle East and Africa (EMEA) was the next best performing region although only Qatar generated a gain. A reversal in the Turkish lira limited downside in that market after an American pastor who had been detained was released by officials. In South Africa, Finance Minister Nhlanhla Nene resigned and President Matamela Cyril Rhamaphosa replaced him with Tito Mboweni, a former governor of the country’s central bank.

Asia ex-Japan was extremely weak with its three largest markets all declining more than 11% with nary a market in the green this month. Chinese economic data released during the month was slightly weaker than anticipated. The Chinese People’s Bank of China (PBOC) responded by implementing another cut in the reserve requirement ratio and numerous regulatory bodies met with the press to make constructive comments on the market. In addition, the government released more details about upcoming tax cuts. Negotiations between the U.S. and China appear to still be at a standstill although representatives of the two countries have agreed to meet at G-20 meetings later in November. In a surprise move, the Reserve Bank of India (RBI) left interest rates on hold. In addition, the government seized control of Infrastructure Leasing & Financial Services Limited, a non-banking financial company that had been causing stress in the system. India’s election commission announced dates for a number of upcoming state elections before year-end.

Outlook​ ​ ​
Consensus expectations for 2018 EM earnings growth have only marginally decreased since October and are now at 14.2% while 2019 estimates remain close to 12%. We believe the asset class continues to look undervalued. Challenges in Europe continue to materialize with great regularity and that is likely to persist in the near term. There appears to be little progress between the U.S. and China in settling the ongoing trade dispute and this does not bode well for the global macroeconomic backdrop. Global supply chains take many years to build and utilize to full potential. Our view remains that a bourgeoning trade war between the U.S. and China would not be in either country’s best interest. Investors should continue to watch how these actions unfold. In closing, there has been no change in the longer term structural support for EM. The forward price to earnings multiple discount for EM equities relative to developed markets has moderated since the end of October and is now at 28%.​

Fred Alger & Company, Incorporated is the parent company of Fred Alger Management, Inc. The views expressed are the views of Fred Alger Management, Inc. as of October 2018. 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.

Risk Disclosure:  Investing in the stock market involves gains and losses and may not be suitable for all investors. The value of an investment may move up or down, sometimes rapidly and unpredictably, and may be worth more or less than what you invested. Stocks tend to be more volatile than other investments such as bonds. Growth stocks tend to be more volatile than other stocks as the prices of growth stocks tend 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 involve the risk that smaller issuers may have limited product lines or financial resources, lack management depth, or have more limited liquidity. 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 differing auditing and legal standards, and securities of such issuers can be more volatile than those of more mature economies.

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. The term risk asset typically refers to assets that have a significant level of pricing volatility and can include high-yield bonds, currencies, commodities and equities.

​This material must be accompanied by the most recent fund fact sheet(s) if used in connection with the sale of mutual fund shares.

Infrastructure Leasing & Financial Services Limited represented 0.0% of Alger assets under management as of October 31, 2018.
Fred Alger & Company, Incorporated 360 Park Avenue South, New York, NY 10010 / www.alger.com 800.305.8547 (Retail) / 212.806.8869 (Institutional)​