Emerging markets' earnings need to improve for rally to be sustainable', says Franklin Templeton

George Geddes

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Emerging markets have had a significantly strong start to 2019 but for the rally to be sustainable, earnings need to improve, says Chetan Sehgal and Andrew Ness of Templeton Emerging Markets Investment Trust.

Several factors have caused the spike in emerging market currencies and equities, according to a recent statement from Franklin Templeton. These factors include the decline in expectations for US interest rate hikes. As a result, the emerging market asset class has seen steady flows. Additionally, the foreseeable conclusion of the trade war between the US and China has resulted in positive returns coming from emerging market funds.

Technology, emerging markets' leading export, has had a significant impact on the global economy as sectors are increasing the adoption of technology disruptors.

Furthermore to the differences between the US and China being resolved, Franklin Templeton believes several other events could have an impact on emerging market investment strategies. India and Pakistan have been in territory dispute in Kashmir which is said to see no further escalation following international pressure to resolve the problem. Franklin Templeton says the conflict is likely to have only a limited impact on investment strategies and therefore are not making any changes to its exposure.

Brazil's President, Jair Bolsonaro, has committed to improving the government's fiscal deficit which Franklin Templeton is expecting to result in an increase of reforms and privatisation. Benefiting from this, Brazil should see significant economic growth which domestic companies will benefit from, however, the country has seen equities dip in the last few weeks.

Regionally, Latin America had a strong start to the year, but the likes of Brazil, Mexico and Chile have seen a slip in performances recently. The iShares MSCI EM Latin America UCITS ETF (LTAM) has seen returns of 7.94% Year-to-Date, despite its losses of 3.87% in the last month.

Likewise to LTAM, the iShares Core MSCI Emerging Markets IMI UCITS ETF (EMIM) which covers more than just the Latin America regions has had a similar performance. With only losses of 0.61% in the last month, the strong rebound from a difficult Q4 2018 has seen the fund produce returns of 5.88% YTD.

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