Emerging Markets Decline in March But Outperform Developed Countries
March 2018
Market Environment
The MSCI Emerging Markets Index produced a -1.83% return in March as the global equity selloff that started in February continued. The selloff included developed markets, as illustrated by the MSCI World Index in March producing a -2.11% return. The U.S. Federal Reserve hiked interest rates during the month for ​the first time this year. Also during March, the U.S. introduced import tariffs on steel and aluminum and announced that additional tariffs will be placed on Chinese imports for alleged intellectual property violations. Commodity prices were mixed with Brent crude recovering and metal prices weakening. Latin America performed best in March with both Peru and Colombia posting positive returns. Peru’s president submitted his resignation ahead of a probable impeachment vote related to purported illegal payments to his presidential campaign. Vice President Vizcarra took over the post. In Brazil, former President Lula was granted an injunction and a Supreme Court ruling at the beginning of April should provide clarity on whether he can participate as a candidate in the upcoming presidential elections. NAFTA negotiations continued among the U.S., Canada and Mexico, and a report surfaced indicating the U.S. may have dropped a proposed 50% origin requirement. It would have required that 50% of the contents of cars manufactured in North America originate in the U.S. and was considered to be a major obstacle to progress in the negotiations. Although the Mexican equity market was weak in March, that news buoyed the Mexican peso.   

Asia ex-Japan was the next best regional performer with the North Asian markets of South Korea and Taiwan outperforming. China, India, Indonesia and the Philippines dragged down regional performance. A South Korean delegation traveled to Pyongyang and subsequently the U.S. president agreed to meet directly with North Korean leader Kim Jong Un. Kim Jong Un made his first trip outside North Korea and traveled to Beijing to meet President Xi Jinping. At China’s National People’s Congress, term limits were abolished, regulatory agencies were combined and fiscal tightening was imposed with a deficit target of 2.6% versus the prior target of 3%. The resulting securities regulator also began fast tracking a listing process around Chinese Depository Receipts. In India, the investigation into fraud at state-owned Punjab National Bank accelerated with federal investigators seeking to question the chief executive officers of more than 30 banks.  

Emerging Europe, Middle East and Africa was the worst performing region, led lower by Turkey, Greece and South Africa. Turkey’s sovereign debt rating was lowered to junk status by Moody’s. In Russia, President Vladamir Putin was reelected with his strongest results to date: 76.7% of the votes. The country expelled a number of diplomats in retaliation for Russian diplomats being expelled from 25 countries, including the U.K. and the U.S. In South Africa, the central bank cut rates by 25 bps and Moody’s affirmed the country’s investment grade rating, which had been at risk of a downgrade.  

Emerging markets earnings are expected to have grown 23% in 2017, according to consensus estimates, and are forecast to grow 15% year over year in 2018 and 11% in 2019. In the U.S., additional tariffs against China are likely to be levied. Those tariffs will likely be met with retaliatory measures and a bourgeoning trade war would not be in any country’s best interest. There has been no change in the longer term structural support for emerging markets. The forward price-to-earnings multiple discount for emerging markets relative to developed markets has continued to narrow and is now 21.5%.

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.

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​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.  

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