2017 may turn out to be a better year for emerging markets like Russia and Brazil, according to Templeton Emerging Market Group's Mark Mobius and Stephen Dover.
The world's second largest economy, China, has also started showing signs of stability and this bodes well for top-line growth opportunities and earnings outlook for emerging market equities, say the two top bosses at Templeton Asset Management.
“…we expect to see GDP growth for emerging markets in 2017 at a solid and accelerating level, markedly above the rate expected from developed markets,” Mark Mobius, executive chairman at Templeton Emerging Markets Group wrote in a blog post.
This augurs well for the entire emerging market basket, said Mobius and Dover.
Manufacturing economies in the emerging market space are back to “a position of current account surplus, while there has also been headway in bringing down the deficits of commodity-exporting countries.”
Better Macro Fundamentals
The blog highlights the fact that debt-to-GDP ratio of emerging market countries are “generally below those of developed markets”, providing a stable and sustainable economic foundation.
China'sgrowth has shown signs of stability and is stronger compared to many other large economies, said Mobius and Dover in the blog.
Emerging market economies will continue to attract overseas investors with their "low and negative yields on many government bonds globally”, they added.
The dividend yields for the MSCI Emerging Markets Index was at 2.58 percent as of December 22 compared to 2.47 percent for the MSCI World Index, Bloomberg data showed.
Adding to the optimism was the price-to-earnings multiples of emerging market stocks, which are lower than those elsewhere, with earnings growth improving “markedly” during 2016, Mobius wrote.
We continue to expect investors to look toward emerging-market equities, given the income prospects available.Mark Mobius & Stephen Dover
The MSCI Emerging Markets Index is trading at 15.27 times, 12-month forward earnings compared to 22.17 times for the MSCI World Index, Bloomberg data showed.
Sectoral Picks
In the current market scenario, they believe consumer-related and information technology sectors look attractive.
“Select stocks in the consumer sectors can provide an effective means to gain exposure to emerging-market economic expansion,” the blog adds.
Technology stocks, on the other hand, appear lucrative as IT becomes “increasingly integral and competitive in emerging markets”.
Earnings growth trends haveimproved markedly during 2016, and we expect this turnaround to continue.
On the monetary policy front, Mobius expects the U.S. central bank's rate hike trajectory to be “gradual”, as bigger or faster interest-rate moves could dampen sentiment and lead to volatility.
“The U.S. presidential election victory for Donald Trump is likely to have many implications for markets around the world, including emerging markets, and may well add to volatility in equities,” the blog says.
U.S. indices have surged since Donald Trump's U.S. election victory on November 8. The Dow, Nasdaq and S&P 500 have all risen more than 5 percent in the six weeks since Trump's victory, with the Nasdaq and Dow both touching record highs last week.
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