Emerging Markets Rally
in January

​January 2019

Market Enviroment​

Global equity markets experienced a strong rebound since their fourth quarter lows in January with the MSCI Emerging Markets Index returning 8.76% compared to the 7.81% return of developed markets as measured by the MSCI World Index. At month’s end, the U.S. Federal Reserve surprised investors by moving to a more dovish stance than anticipated and issued a statement on its balance sheet policy suggesting that the central bank would maintain higher reserves than previously thought, a “QT (quantitative tightening) light.” Commodities followed the risk rally higher with crude prices and iron ore particularly strong.

Latin America continued as the best-performing emerging markets (EM) region with Brazil and Colombia leading the gains. Jair Bolsonaro was sworn in as Brazil’s 42nd president and he maintained his promises of structural reform. Investors now believe these reforms will be presented to the legislature before the Carnival holidays begin and will include social security reform. After the International Monetary Fund (IMF) lowered its estimate for Mexican gross domestic product (GDP) growth at the beginning of the month, President Andrés Manuel López Obrador, or AMLO, stated that the economy would grow faster than the estimated 2.1% rate. Fourth quarter 2018 GDP was actually better than estimated at 1.8% year over year. Also in Latin America, Colombia’s new government enacted proposed corporate tax cuts during January.​

Emerging Europe, Middle East and Africa (EMEA) was the next best performing region led by Turkey, Russia and South Africa. Turkey surged on the change in rate outlook in the U.S. and a rebound in the Turkish lira. The removal of sanctions on select Russian companies likely acted as a tailwind to that market, as did the rise in crude prices. In South Africa, a rebound in currency also likely buoyed equity markets. Both the Turkish and South African central banks kept rates steady during the month.
 
Asia ex-Japan was the worst performing region for a second straight month, dragged down by India, Taiwan and Malaysia. For the month, India was the only EM country to turn in negative performance. Investors there are beginning to pivot their attention to upcoming elections in which a decisively large Bharatiya Janata Party, or BJP, win is no longer assured. Chinese economic data released during the month continued to show weakness and talks between the U.S. and China at month’s end were not expected to yield substantial progress. Thailand’s first election since the military seized power in 2014 was originally scheduled for near the end of February but that is likely to be delayed until later in the year.

Outlook​​

The consensus estimate for 2018 EM earnings growth has decreased from 13% to 10.4% and the estimate for 2019 has settled close to 7% from a 10% estimate in December. Earnings growth estimates across all equity markets have moved down for 2019. EM equities continue to look undervalued although less so after the January rally and the descent of expected earnings growth. Challenges in Europe continue to materialize with great regularity and that is likely to persist in the near term with Brexit deadlines approaching and European Union parliamentary elections scheduled for May. Progress appears to have been made between the U.S. and China in recent meetings and there could be a trade dispute truce in the near term. 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 (P/E) discount for EM equities relative to developed markets narrowed dramatically in January and ended the month at close to 22%.​​


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 January 2019. 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 certain risks, and may not be suitable for all investors. Growth stocks tend to be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. A significant portion of assets will be invested in technology companies, which may be significantly affected by competition, innovation, regulation, and product obsolescence, and may be more volatile than the securities of other companies. Emerging Markets securities involves special risks including currency fluctuations, less liquidity, inefficient trading, political instability, and increased volatility.

​​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 forward price-to-earnings (P/E) is the current market price of a company divided by its expected earnings during the next 12 months.

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

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