Trade Concerns and Politics
Overshadow Strong Fundamentals                               May 2018
The MSCI Emerging Markets Index declined 3.52% in May and underperformed international developed markets as measured by the 0.72% gain of the MSCI World Index. Political uncertainty in Italy and Spain along with ongoing concerns regarding global trade helped drive equity losses around the globe. Sharp depreciation of some emerging markets currencies raised concerns about higher inflation and tighter monetary policies in some countries. At month end, U.S. tariff exemptions ended on steel and aluminum and other countries began announcing retaliatory tariffs. A summit between North Korean leader Kim Jong Un and President Donald Trump emerged as a possibility after a prior meeting had been cancelled. Expectations that the U.S. Federal Reserve would accelerate monetary tightening moderated at month end as the yield of the 10-year U.S. Treasury dropped below 2.9%. Commodity prices were mixed, with Brent oil increasing strongly in the first half of the month but falling during the second half in response to possible OPEC easing of production limits. Industrial metal prices strengthened, underpinned by nickel and coal prices.  

All regions were in the red during May with Asia ex-Japan performing the best. In that region, China was the only country to produce positive performance with economic data and the addition of A-Shares to the MSCI benchmark supporting results. In India, the Karnataka state election demonstrated that Congress and other opposition parties should not be ignored. Indeed, a coalition formed by Congress and the Janata Dal party secured leadership of the state and could serve as a blueprint for the next national election. Malaysia’s general elections were also noteworthy. In a surprising development, the Barisan Nasional (BN) party, which has ruled for 61 years, lost its legislative majority. Perhaps even more surprising, Mahathir Mohamad, age 92, returned after a 15-year retirement from politics and secured the prime minister position. Mohamad formed a coalition with Anwar Ibrahim, his former protégé turned nemesis. Ibrahim had previously served as prime minister and more recently served as finance minister until being jailed by Mohamad in 1999. The Malaysian king, however, pardoned him.  

Emerging Europe, Middle East and Africa (EMEA) was the second-best performing region. After political woes surfaced in Italy, the Greek equity market plummeted almost 20%. Turkey was also weak with the country’s currency depreciating nearly 10%. The country’s central bank responded with an emergency 300bps interest rate hike. Turkey faces presidential and parliamentary elections later in June and polls point to President Recep Tayyip Erdoğan winning in the first round. A tighter race may ensue if a second round is required. In Russia, President Vladimir Putin was inaugurated for another six-year term with Dmitry Anatolyevich Medvedev remaining as prime minister.  

Latin America was the worst performing region with Brazil being the second-worst performer among all emerging markets countries. A truckers’ strike in Brazil roiled the country in the second half of May as stores ran out of product, gas stations ran out of fuel and blockades obstructed key travel routes. The government, trying to end the strike, announced a 60-day diesel price cut and an immediate reduction of certain diesel taxes. The fragility of Brazil’s current government was further exposed as oil workers subsequently announced a strike. We believe Brazil economic data will likely be weaker than anticipated in the upcoming months and full-year GDP estimates may moderate. In Mexico, NAFTA negotiations are not likely to conclude before the July presidential elections where Manual Lopez Obrador (AMLO) is comfortably in the lead. Some polls are indicating his party, Morena, could win one of the legislative chambers. If his party wins, checks and balances on his presidency may not be as strong as some have hoped. In Colombia, presidential elections will go to a second round on June 17, as expected.  

Outlook
Consensus estimates for emerging markets’ earnings continue to drift upward and now call for growth to exceed 16% year over year for 2018 and have held steady at 11% for 2019. Estimates for this year will likely drift down slightly as Brazilian earnings are likely to be weaker than anticipated. Worries about Europe have resurfaced as Italy came close to a constitutional crisis. The country’s new prime minister and the parties that support him seem likely to clash with the European Union on a number of fronts. The U.S.’s decision to proceed with steel and aluminum tariffs and the announcement of possible automotive tariffs do not bode well for global trade. We believe a bourgeoning trade war between the U.S. and China would not be in either country’s best interest and investors should continue to watch the unfolding negotiations. We remain optimistic, however, because there has been no change in the longer term structural support for emerging markets and valuations are attractive. The forward price-to-earnings multiple discount for emerging markets relative to developed markets has widened slightly and was 24.6% at the end of May​. 


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 May 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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