Emerging Markets Gain in July and Remain Attractively Valued
July 2018
The MSCI Emerging Markets Index generated a 2.28% return during July and trailed the 3.15% gain of developed markets as measured by the MSCI World Index. Investor sentiment improved marginally during the month as crude prices declined, uncertainties around global trade moderated and emerging markets currencies held relatively steady with the exception of the Turkish lira. U.S. President Donald Trump appeared to have held a productive meeting with European Commission President Jean-Claude Juncker, which helped deescalate trade tension between the U.S. and the European Union. In addition, the results of the Mexican presidential election seemed to spur some new vigor into Nafta discussions. Worries about a trade war with China, however, deepened.

All regions produced positive returns during July with Latin America leading the rally. Brazil and Mexico had strong returns with the latter also experiencing considerable currency appreciation against the U.S. dollar. Lopez Obrador (AMLO) won the Mexican presidency with 53% of the votes, and his party, Morena, along with coalition partners, won control of both houses in the Mexican congress. Brazil’s stock market rally belied continuing weak economics as illustrated by the government lowering its GDP estimate for 2018 to 1.6%, which is more in line with forecasts from economists in the private sector. The focus for the Brazilian market, we believe, has shifted to the country’s upcoming presidential elections.  

Emerging Europe, Middle East and Africa (EMEA) was the next best performing region driven by gains in Poland and Qatar. Turkey was once again the weakest performer with investors becoming wary of nepotism after the appointment of President Recep Tayyip Erdoğan’s son-in-law as head of the country’s combined Treasury and Finance Ministry. Near month’s end, U.S. Vice President Michael Pence proposed implementing economic sanctions on Turkey if the country does not release Andrew Brunson, an American pastor. Also in EMEA, South African President Cyril Ramaphosa received a boost for his investment drive as Chinese President Xi Jinping pledged to commit almost 15 billion USD to the country.  

Asia ex-Japan was the worst performer during July. Within the region, the Philippines and Thailand were the strongest markets followed by India, while China produced negative performance. Chinese markets continued to languish on Sino-U.S. trade tensions as the U.S. announced another tariff investigation into a potential 10% duty on $200 billion worth of Chinese goods under Section 301. Economic data released during the month was mostly positive with China’s second quarter GDP growing 6.7% year over year and June loan growth being much better than anticipated. 

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. The reporting season for the first half of 2018 and the second quarter has started and contrary to our expectations, estimates for full-year 2018 have not drifted downward. We believe estimates are likely to decline as additional corporate reporting begins to reflect the impact of currency depreciation seen across emerging markets earlier this year. European worries continue to surface with regularity and the likelihood of a more serious trade dispute between the U.S. and China grows with each new tariff threat from the U.S. It is clearly more difficult to pull back once tariffs are implemented and we believe 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 July.​

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 August 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)​