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BLOG: Emerging market investors could be the real winners of the World Cup

Written by: Chetan Sehgal
Emerging markets such as Morocco, Saudi Arabia and South Korea have proven themselves as forces to be reckoned with in the 2022 Word Cup. And for investors, they should be on the lookout for strong returns from the 'underdogs'.

This year’s World Cup has already produced its fair share of shock results. We have seen huge upsets, with Saudi Arabia beating Argentina in a historic win as the first emerging market Asian team to outdo one from Latin America, and Morocco securing a shock 2-0 victory against one of the tournament favourites Belgium.

This is a reminder that with the World Cup games comes unpredictability and, for many, suspense, excitement, and passion.

The experience isn’t so different with emerging market investing. Home to some of the world’s fastest growing economies, particularly China, South Korea and Taiwan, which have expanded significantly over the past three decades, each market has its own nuances and a distinct economic and financial evolution.

While some have grown as suppliers of resources, others have developed as providers of manufacturing expertise, either by offering services or because of their large, untapped consumption potential.

Home to companies with exposure to new technologies, from solar and electric vehicle battery producers to semiconductor designers and manufacturers, some have also become market leaders in technology development.

As each emerging market is unique and constantly evolving, investing in them can sometimes be unpredictable.

Emerging markets in 2023

Looking ahead, the International Monetary Fund (IMF) has cut its forecast for emerging market GDP growth to 3.7% in 2023, excluding China, which is likely to accelerate in 2023 following the Covid-19-induced slowdown this year.

This is further compounded by slower earnings growth, rising interest rates, and global recession risk, creating headwinds for emerging markets. Many investors may find the current macro backdrop concerning, though with inflation also expected to slow in developed and emerging markets, this should bring some relief to investors.

Despite the uncertain outlook, bright spots exist.

LATAM driven by rise in the energy sector

First, we are positive on the outlook for equity markets in Latin America, particularly Brazil. For example, Latin American economies have been among the best performers in the emerging markets category year-to-date, driven by the rise in the energy sector, which has posted double-digit returns. The IMF has also raised its economic growth forecast and reduced inflation expectations for the continent in 2023.

In Brazil, Luiz Inácio Lula da Silva’s successful run for a third term as president of Brazil, in combination with his party’s lack of control of either House of Congress, imply there are checks and balances in place to act as fiscal constraints. Additionally, recent reforms suggest the risk of a repeat of past interference in the management of government-controlled companies has diminished.

India on a strong growth trajectory

We are also optimistic about India. The country’s growth trajectory is forecast to outpace all emerging and developed economies in 2023, with an IMF estimate of 6.1% versus 4.4% for China, 1% for the US and 0.5% for the euro area.

India’s growth in 2023 and beyond is expected to be robust, with several catalysts such as the rise of the middle class, a potential manufacturing boom and demand for talent in the IT sector. Indian equities will likely continue to outperform other emerging markets amid expectations for continued strong economic growth.

Recovery unfolding in South Korea

There are also opportunities tied to the recovery in South Korea, particularly in key export areas. The backdrop of large US rate hikes, slowing global growth leading to concerns around a recession, and elevated oil prices have led to severe weakness in South Korea’s currency, the won.

However, a weaker won is a tailwind for South Korean exporters, as it enhances their competitiveness relative to peers, which we think leads to meaningful bottom-up stock picking opportunities.

As we look into 2023, we believe normalisation of interest rates and improvements in global growth could be positive for the South Korean stock market which was impacted by a cyclical slowdown and higher energy prices.

It seems feasible that the country could achieve stable 2.5% GDP growth, with low unemployment rates and less-sticky inflationary conditions.

Opportunities in China despite significant turmoil

Finally, despite the significant turmoil in the Chinese market, there are opportunities for investors in businesses aligned with the strategic priorities of the Chinese Communist Party, like renewable energy and the electric-vehicle supply chain.

We’ll find out more on the country’s economic policies at the National People’s Congress (NPC) in March 2023, but our outlook for China remains constructive and we hope it could weigh in on long-term peace across the Taiwan Strait.

While our base-case scenario remains a more formal reopening after the Two Sessions of the NPC (i.e. second quarter 2023), the rapidly growing middle class still points to rising consumption and premiumisation themes that will likely drive growth for higher-end goods and services over the long-term.

China’s long-term aim to become technologically independent also represents a huge growth opportunity, with its electric vehicle and solar sectors performing particularly well recently, which should lead to domestic substitution with strategic benefits.

As we cheer on our home nation, favourite team, or the underdog at the World Cup, it’s also an interesting time to keep an eye on emerging markets. With a rich history of evolution and progress, we encourage a long-term investment approach to emerging markets and, just like some of the recent shock World Cup results, one that values a bit of unpredictability, as herein lies the opportunity.

Chetan Sehgal is lead portfolio manager at Templeton Emerging Markets Investment Trust

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