Emerging Markets Remain Attractively Valued

​June​​ 2019

Market Environment​

The 6.3% return of the MSCI Emerging Markets Index trailed the 6.6% return of developed markets as measured by the MSCI World Index during June. Risk taking resumed during the month, driven in response to dovish inflation comments by the U.S. Federal Reserve and the European Central Bank, as well as by expectations of a cease-fire in the U.S.-China trade war. Further declines in purchasing managers’ indices (PMIs) during the month suggested that global growth may continue to deteriorate in the near term. Energy prices were strong, with West Texas Intermediate crude and Brent up 9.3% and 2.4%, respectively, as the U.S. placed additional sanctions on Iran and a bullish set of Department of Energy crude inventory statistics was released. Gold prices rallied significantly, climbing to $1,410 per ounce and recording the biggest monthly gain in three years, likely a result of data suggesting a slowdown in global economic growth.

Latin America was the best-performing region, once again driven by Brazil as the passage of pension reform drew closer. Argentina was also strong, in part, on the announcement that President Mauricio Macri selected Senator Miguel Pichetto, who is a moderate Peronist, as his running mate for the October elections. In Mexico news, the U.S. and Mexico reached an agreement to avoid additional tariffs on Mexican goods. Nevertheless, Fitch downgraded Mexico’s sovereign debt rating by one notch and Fitch lowered its outlook on the country to negative. In Chile, the central bank cut the benchmark rate by 50 basis points (bps) when no rate cut had been expected.

Asia ex-Japan was the next best region with China, South Korea and Thailand outperforming and India being a notable laggard. Chinese export growth rebounded in May although most investors attributed that to frontloading ahead of tariffs. While there were no scheduled talks between the U.S. and China outside of the G20 Osaka Summit that was held at the end of June, investors remained optimistic during the month that President Trump and President Xi would agree during the event to delay new tariffs and restart negotiations. In other trade-related matters, the U.S. terminated preferential trade status for India, which in turn announced tariffs on U.S products mid-month. The Reserve Bank of India cut rates by 25 bps, moving to a more accommodative stance, while central banks in both Indonesia and the Philippines kept rates on hold.
 
Emerging Europe, Middle East and Africa (EMEA) was the laggard for the month with South Africa and Russia the best-performing markets in the region. Large protests occurred in the Czech Republic after reports that one of the prime minister’s companies illegally obtained aid from the European Union. They were the largest protests in the country since the Velvet Revolution in 1989. Like Mexico, Turkey had a sovereign downgrade with Moody’s moving the credit rating to B1. In South Africa, President Cyril Ramaphosa’s State of the Nation address was better than expected but that does not diminish the risk of a sovereign credit downgrade later in the year. Turkey and Russia confirmed that Russia’s sale of the S-400 missile system to Turkey was on track, a sore point for Turkey’s NATO allies.

Outlook​​

The EM consensus earnings growth estimate for 2019 has fallen slightly to 3% while 2020 growth estimates remain at 14%. We believe the asset class remains undervalued but rallies are likely to be short lived while trade dissonance remains at the forefront of global challenges. Trade negotiations between the U.S. and China are set to resume but the schism between the two countries remains quite large and is unlikely to be resolved to the satisfaction of both countries in the near term. Indeed, many academics in the field of international relations are suggesting a new paradigm for U.S.-Chinese relations. Our view remains that a bourgeoning trade war between the U.S. and China would not be in either country’s best interest; one should continue to watch how these actions unfold. The forward price-to-earnings multiple discount for EM equities relative to developed markets ended the month widening slightly to 21% but there has been no change in the longer term structural support for Emerging Markets.


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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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.

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