Trade Woes Weighed Upon Equities in May

​May​ 2019

Market Environment​

Risk-off sentiment continued in May with the MSCI Emerging Markets Index declining 7.22%. It was the fourth consecutive month of underperformance relative to the MSCI World Index of developed markets, which declined 5.68% in May. The declines occurred in the face of a re-escalation of trade tensions. The U.S. yield curve inverted for the second time in just a few months, with bond futures beginning to price in two rate cuts by the U.S. Federal Reserve by yearend. Base metal prices fell sharply along with crude oil prices; West Texas Intermediate dropped 16% and Brent declined 12%.

Latin America was the best performing region although it still posted negative performance. Brazil generated a gain driven by resurgent momentum for pension reform while Argentina’s outperformance was likely triggered, in part, by its re-inclusion in the MSCI Emerging Markets Index. Mexico was pulled down at month’s end as trade tensions increased and U.S. President Donald Trump invoked the International Emergency Economic Powers Act to address an “emergency at the Southern Border,” essentially laying out a timeline for tariffs on all Mexican goods. This action will likely complicate passage of the United States-Mexico-Canada Agreement (USMCA) and could color sentiment about Chinese leadership and any U.S. promises in future trade negotiations.

Emerging Europe, Middle East and Africa (EMEA) was the next best performing region, driven by Russia and Greece. In the former, index heavyweight Gazprom unexpectedly proposed raising its dividend 60%, triggering a rally in the name. In Greece, Prime Minister Alexis Tsipras called for early elections after the Coalition of the Radical Left, also known as Syriza, lagged the New Democracy party in the European Parliament elections. In South Africa, the African National Congress won with a comfortable majority giving President Cyril Ramaphosa room to consolidate power although a new cabinet retained his deputy president, David Mabuza, who was thought to be on shaky ground.
 
Asia ex-Japan was the worst region for the month, impacted by a sharp fall in Chinese equities. Talks between the U.S. and China have paused with no new negotiations on the calendar. The U.S. raised tariffs from 10% to 25% on $200 billion worth of Chinese imports with China retaliating with additional tariffs on $60 billion worth of goods. Additionally, the U.S. Commerce Department formally added Huawei and 70 of its affiliated companies to a U.S. trade blacklist. India’s presidential election ended with a decisive win for current Prime Minister Narendra Modi and his BJP party, ensuring policy continuity in that country. In Indonesia, incumbent Joko Widodo, also known as Jokowi, was declared the official winner in the presidential elections and will start his second term in October. Midterm elections in the Philippines, the only Asia market to generate gains for the month, resulted in wins for most of the candidates supported by President Rodrigo Duarte.

Outlook​​

The EM consensus earnings growth estimate for 2019 did not budge during the release of first quarter earnings and remains at approximately 4% with early 2020 earnings estimates moving up toward a 14% growth rate. We believe EM remains undervalued although less so after year-to-date moves; any rallies are likely to be short lived while trade tensions remain at the forefront of global challenges. Trade negotiations between the U.S. and China have paused and are unlikely to resume prior to the G-20 summit near the end of June. 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) multiple discount for EM equities relative to developed markets ended May close to 20%.


The views expressed are the views of Fred Alger Management, Inc. and Alger Management Ltd. (together with their affiliated entities “Alger”) as of June 2019. Alger has used sources of information which it believes to be reliable; however, this publication is not intended to be and does not constitute investment advice. These views are subject to change at any time and they do not guarantee the future performance of the markets, any security, or any funds managed by Alger.

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The Morgan Stanley Capital International (MSCI) Emerging Markets Index (gross) 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.

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