Currencies Stabilize but Trade 
Concerns Linger in September​                          September​ 2018​

The MSCI Emerging Markets Index generated a -0.50% return during September and underperformed the 0.60% gain of developed markets as measured by the MSCI World Index. Emerging markets (EM) currencies, after weakening substantially in prior months, stabilized relative to the U.S. dollar, but uncertainties about global trade persisted and continued as an overhang on global markets. The U.S. Federal Reserve raised rates 25 basis points (bps) as anticipated and signaled intentions to enact one more hike before year-end. Strong crude oil prices continued during the month and the energy sector performed the best. 

Among regions, Latin America performed the best led by Brazil, although all of the region’s markets advanced. The appeal of Brazil’s equity market benefitted from its prior underperformance, which led to sagging valuations. On the political front, the Workers’ Party, or PT, announced Fernando Haddad as its official candidate for president to replace former President Lula da Silva, who has been barred from seeking public office. Jair Bolsonaro, another presidential candidate, was stabbed early in the month forcing him to temporarily suspend his campaigning. The country’s central bank held rates steady but indicated it is ready to start tightening. In Mexico, NAFTA was reborn as the USMCA after a late night announcement on September 30 indicating the U.S. and Canada had reached a trade agreement. Ratification of the agreement by the three countries is expected in late November. 

Emerging Europe, Middle East and Africa (EMEA) was the next best performing region driven by a rebound in Turkey and solid performance by Russia’s energy sector. The Turkish central bank hiked its overnight rates mid-month by 625bps, restoring its credibility after failing to significantly hike the previous month. The Russian central bank unexpectedly increased rates by 25bps and some structural reform, in the form of higher retirement ages for qualifying for state pensions, passed the Duma, which is the country’s legislative body. Greece performed the worst during the month, in part due to investor worries about Italian deficits which impacted investors’ risk assessment of the listed Greek banking sector. 
 
Asia ex-Japan was broadly weak with only a few markets outperforming, namely South Korea, Taiwan and Thailand. India was particularly weak after the country was hit by a liquidity event among non-banking financial companies. U.S. imports from China faced sanctions with President Trump announcing additional tariffs. A 10% tariff went into effect on September 24 and will escalate to 25% on January 1. China, in return, announced retaliatory tariffs on $60 billion of U.S. imports. Trump has also threatened to impose tariffs on an additional $267 billion worth of Chinese imports. Negotiations have been at a standstill between the two countries. Likely in reaction to the U.S. actions and in a bid to boost the domestic economy, China's State Council announced that tariffs on 1,585 products will be reduced from 9.8% to 7.5% as of November 1 and the country's National Development and Reform Commission pledged to support the digital economy. The reduced tariffs are expected to apply to imports from all countries, but imports from the U.S. will still be subjected to the retaliatory measures.

A third summit with heads of state from North and South Korea was held in Pyeongyang, during which the leaders jointly announced specific denuclearization steps intended as part of ending the war on the Korean peninsula. The Philippines, one of the weakest performers, saw inflation rise to a 9-year high in August. The country’s central bank responded in September by hiking rates 50bps. Agricultural destruction from Typhoon Mangkhut across the Philippines will likely keep pressure on crop prices in the near term.  

Outlook​

Consensus expectations for 2018 EM earnings growth have declined and now stand at 14.4%. We believe the revised expectations better reflect the impact of recent currency volatility. Consensus growth estimates for next year have increased and are now close to 12%, which we believe makes the asset class look extremely inexpensive. European worries continue to crop up with regularity. In addition, the increasing likelihood of a more serious trade dispute between the U.S. and China does not bode well for global supply chains that take many years to build and to utilize to full potential. A burgeoning trade war between the U.S. and China would not be in either country's best interest and we believe investors should continue to watch how this issue unfolds. In closing, there has been no change in the longer term structural support for EM. The forward price-to-earnings multiple discount for EM equities relative to developed markets has widened again and is now close to 29%.


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 October 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.​​
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