Emerging Markets Valuations​ Remain Attractive after a Challenging Month
August​ 2018​
The MSCI Emerging Markets Index generated a -2.67% return during August and underperformed the 1.28% return of developed markets as measured by the MSCI World Index. Concerns about potential contagion from deteriorating conditions in Turkey and Argentina, along with continued uncertainties around global trade, weighed on investors. Emerging markets currencies were extremely weak with six currencies falling more than 5% during the month. Crude prices displayed strength during the month while soft commodities and industrial metals were weak. NAFTA trade tensions began to ease as Mexico and the U.S. concluded bilateral talks on a preliminary agreement at month’s end and discussions with Canada were extended to the end of September. Worries about a trade war with China, however, persisted.

All regions declined during the month with Asia ex-Japan turning in the best performance, led by the Philippines, Thailand, South Korea and India. Trade talks with China resumed for two days in late August with no progress made. Open hearings on the next round of tariffs were scheduled to finish during the first week of September. Tariffs on an additional $16 billion USD of Chinese goods sold in the U.S. went into effect mid-month, and President Donald Trump threatened an additional third round of tariffs. Chinese and Thai officials signed a number of agreements that aim to double Chinese trade and investment in Thailand. India’s government announced a new health insurance plan to be rolled out in late September, ahead of parliamentary elections.

Emerging Europe, the Middle East and Africa (EMEA) was the next best performing region, driven by performance in Egypt, Hungary and Qatar. Turkey remained the weakest performer, turning in its worst month since the Global Financial Crisis; bond yields there increased almost 600 basis points (bps) yet the central bank did not make any policy announcements. In addition, there appears to be a widening gap in diplomacy between the U.S. and Turkey, as illustrated by Turkey’s leaders saying the country will continue to buy natural gas from Iran and the U.S. implementing sanctions on two Turkish officials. Two ratings agencies, S&P and Moody’s, downgraded their ratings on Turkey to “junk.” South African equities were the next weakest in the region. President Cyril Ramaphosa continues to push forward with land reform, exacerbating rand weakness. Also during the month, the U.S. levied new sanctions on Russia in retaliation against the poisoning of a former spy in the United Kingdom.

​Latin America was the weakest regional performer with all markets posting negative returns. Brazil was hit by Argentinean woes and political uncertainty while Mexico saw profit taking in response to successful NAFTA negotiations. Argentina, which will join the MSCI Emerging Markets Index in May, hiked rates to 60% from 45% mid-month as its currency plummeted. The country has secured IMF assistance and even though it is attempting to follow textbook macroeconomic policy, it has been sending mixed messages to markets. Growth in that country will now likely be subdued for the near future. This has weighed on Brazil, which is one of Argentina’s largest trading partners. Brazil’s electoral court has disallowed former President Lula da Silva from participating in upcoming elections and early polls show no clear winner among the remaining candidates.

​​​Consensus expectations for 2018 emerging markets earnings growth have drifted down from 16% year over year to 15% while 2019 estimates remain above 11%; hence, in our view, the asset class continues to look extremely inexpensive. The reporting season for the first half of the year and second quarter has almost concluded and while earnings numbers have moved down slightly for 2018 as we anticipated, they have not yet begun to decline for 2019. Recent currency volatility means that earnings estimates expressed in U.S. dollars need to decline to reflect the impact of currency depreciation. European worries continue to crop up 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 trade actions have been taken and a bourgeoning trade war between the U.S. and China would not be in either country’s best interest. We believe investors should continue to keep a careful watch over trade policy. In closing, 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 deteriorated again and is now slightly above 27.0%.​

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 September 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.

This material must be accompanied by the most recent fund fact sheet(s) if used in connection with the sale of mutual fund shares.​​

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