Geopolitics Drive Volatility but
Valuations Remain Attractive                               April 2018
Market Environment
The MSCI Emerging Markets Index declined 0.42% in April and underperformed international developed markets as measured by the 1.21% gain of the MSCI World Index. Geopolitics dominated emerging markets as the Office of the United States Trade Representative (USTR) announced a preliminary list of tariffs on Chinese imports totaling $50 billion. The U.S. also announced sanctions on a number of Russian individuals and companies, which triggered a large uptick in alumina and aluminum prices. On a more positive note, North Korean leader Kim Jong Un crossed the demilitarized zone in a historic summit with South Korea. In the U.S., anticipation of faster monetary tightening by the Federal Reserve caused 10-year Treasury yields to exceed 3% for the first time since 2014 and contributed to the dollar’s strength during the month. Commodity prices all performed strongly with aluminum up 13% and Brent crude oil touching $75 USD per barrel.  

Only Asia ex-Japan produced a positive number for the month with India staging a recovery while prices of equities in South Korea likely benefited from the country’s historic summit with North Korea. Chinese markets started April with a sharp fall but were essentially flat by month end. After the USTR development, China announced a list of retaliatory actions of similar scale and intensity. The People’s Bank of China also announced a 100 bps cut in the required reserve ratio for most of the country’s commercial banks and the country’s financial regulators began providing more details on the China depository receipt program. India’s central bank kept rates on hold at its policy meeting and inflation there appears to be consistent with expectations while February industrial production was stronger than anticipated, growing 7.1% year over year. Also in Asia, Malaysia’s prime minister dissolved parliament and general elections were set for May 9. The Malaysian leader also announced a pay increase for civil servants.  

The performance of equities in Latin America was mixed with Brazil posting a decline. Former President Luiz Inácio Lula da Silva lost his court appeal regarding his corruption conviction and a warrant was issued for his arrest. He subsequently surrendered to police to start serving a 12-year prison term. Presidential elections are scheduled for October and the most recent polling shows right wing candidate Jair Bolsonaro leading, although official candidate registration is not until July. Brazilian economic data has been weaker than anticipated and GDP estimates for the full year are likely to be tweaked down as we progress through the second quarter. Nafta negotiations continued between the U.S., Canada and Mexico and there is a probability that a preliminary deal could be concluded prior to the Mexican presidential elections, in which Andrés Manual Lopez Obrador, also known as AMLO, remains comfortably in the lead. Representatives of those three countries are scheduled to resume negotiations after May 7 because the principal U.S. actors were in China for trade discussions at the end of the month.  

Emerging Europe, Middle East and Africa (EMEA) was the worst performing region with Russia and Turkey being the weakest among all emerging markets countries. Russian weakness resulted from the imposition of additional sanctions and although Brent crude oil prices rose, the Russian ruble depreciated by a greater amount. In Turkey, the economic backdrop continued to be fragile as the country runs a high current account deficit and has double-digit inflation. The country’s central bank hiked rates during the month. In addition, some political uncertainty has arisen as the ruling AKP party has called for early presidential and parliamentary elections in June. Polls have Recep Tayyip Erodgan winning in the first round, but a tighter race seems to be playing out for the second round. In Hungary, Prime Minister Viktor Mihály Orbán and his party easily won parliamentary elections for a third consecutive term. Other EMEA developments included South African President Cyril Rampahosa calling for a five-year, $100 billion USD investment drive, an ambitious target.  

Outlook
Consensus estimates for emerging markets’ earnings continue to drift upward and now call for growth to exceed 15% year over year for 2018 and have held steady at 11% for 2019. As previously mentioned, U.S. tariffs against China were met with retaliatory measures. We believe a bourgeoning trade war would not be in either country’s best interest and one should continue to watch the unfolding negotiations. We believe, however, that 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 once again widened slightly and was 23.3% at the end of April.. 


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 April 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.  

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