Emerging Markets: ​Trade Rhetoric and Currency Weakness Weigh Upon Emerging Markets
June 2018
​The MSCI Emerging Markets Index generated a -4.09% return during June and trailed the flat performance of developed markets as measured by the MSCI World Index. June marked the fifth consecutive monthly decline for emerging markets equities. Concerns about weakening global trade, higher crude oil prices, and currency depreciation extended pressure on the asset class. Global coordination of trade seemed to be on shaky ground after U.S. President Donald Trump refused to endorse a G7 joint communique, leaving traditional U.S. allies perplexed. In the meantime, the U.S. Department of Commerce continued to assess whether automobile imports pose enough of a national security threat to justify new tariffs. A suggestion that the assessment might be completed sooner than anticipated further perplexed U.S. allies. Worries about a trade war with China also deepened after the U.S. announced a review of adding tariffs to an additional $200 billion of Chinese imports.

The U.S. Federal Reserve approved its second 25 basis points (bps) increase to the fed fund’s rate this year and signaled what investors believed was a more hawkish outlook for controlling inflation. The Federal Reserve’s guidance fueled expectations that the central bank will accelerate monetary tightening. U.S. 10-year Treasury yields, however, remained below 2.9% for most of the month. Commodity prices remained mixed with Brent oil increasing again despite OPEC announcing that it will reduce production while industrial metal prices declined. MSCI announced updates to its indices with Argentina and Saudi Arabia being scheduled for inclusion in the Emerging Markets Index next year.

All regions were in the red during the month with Emerging Europe, the Middle East, and Africa (EMEA) being the best performer. Within EMEA Greece was the best performing country during June, which was not surprising given its steep fall the prior month. Its creditors reached agreement on debt relief at the Eurogroup meeting, resulting in Greece receiving a 15 billion euro loan tranche, a 10-year extension on a European Financial Stability Facility loan, and a 10-year grace period on interest payments. Turkey was the weakest performer, with its returns not stabilizing until later in the month as President Erdogan and the AKP party won an unexpectedly strong election victory. During the month, the Central Bank of Turkey increased its benchmark rate another 125 bps. South African markets were also weak as feeble GDP data gave investors pause.

Latin America was the next-best performing region with Mexico equities generating positive results prior to the country’s July 1 elections. Throughout June, polls indicated that the National Regeneration Movement party, or Morena, which is led by Lopez Obrador (AMLO), would easily win the presidency and control at least one of the legislative houses. In Colombia, Ian Duque won the presidential elections in the second round. Brazil remained weak and was the second-worst performing emerging markets country.

Asia ex-Japan was the worst performer in June. In that region, all markets declined. The best performers were India and Taiwan with each down less than 3%. China’s industrial production, investment, and retail sales figures released during the month were all weaker than anticipated. The People’s Bank of China responded by reducing its reserve requirement ratio as of July 5, just one day before anticipated U.S. tariffs were scheduled to go into effect. The U.S.-North Korea summit in Singapore was seen as a public relations success as it was the first time the two heads of state have met. A joint statement resulting from the summit, however, was viewed as light on details. President Moon in South Korea capitalized on his negotiations with North Korea with South Korea’s ruling Democratic Party doing well in local and National Assembly by-elections.  

Outlook
Consensus expectations for 2018 emerging markets earnings growth remain above 16% year over year and 2019 estimates have remained at 11%, which we believe has resulted in the asset class looking extremely inexpensive after its recent battering. Estimates for this year will likely drift down slightly after first half reporting as Brazil earnings are likely to be weaker than anticipated and estimates begin to reflect the impact of currency depreciation for the full year. European worries continue to crop up with regularity and an escalating tariff skirmish between the U.S. and China is possible. It is clearly more difficult to reverse trade actions, and 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. 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 widened again and was close to 27% at the end of June.

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 July 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.  

Fred Alger & Company, Incorporated 360 Park Avenue South, New York, NY 10010 / www.alger.com 800.305.8547 (Retail) / 212.806.8869 (Institutional)