EM Q&A: Why Domestic Demand Matters

Chetan Sehgal, lead portfolio manager, Templeton Emerging Markets Investment Trust, on the current opportunities in EM

James Gard 7 September, 2023 | 9:36AM
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As part of our special report week, we asked Chetan Sehgal, lead portfolio manager, Templeton Emerging Markets Investment Trust (TEMIT), the following questions

Do you see more opportunities in faster-growing countries now that India has performed well and China is struggling?

Chinese economic growth is slowing due to a higher base (it is the world's second largest global economy, over five time the size of India), demographic headwinds and geopolitical tensions. But even with a lower rate growth, China can still continue to grow faster than most developed markets, and make an outsized contribution to global growth. Despite top-down concerns, we continue to find bottom-up stock-picking opportunities in China.

While India will not overtake China in terms of its contribution to global economic growth in the coming decade, we believe India will make a meaningful contribution to growth, as well as account for an increasing share of our investment portfolios. The expansion of Indian investment opportunities only serves to improve the breadth and depth of the emerging market investment universe. Despite headwinds, China remains a key driver of global growth and an important source of investment opportunities within which we continue to find bottom-up stock picking opportunities.

What does India actually offer investors that China cannot?

India offers investors a significant growth opportunity given its structural tailwinds, which include attractive demographics, a market-oriented economy, and a rising middle class. This opportunity was previously constrained by bottlenecks in infrastructure, bureaucracy, and a weak fiscal position. Over the past decade, infrastructure investment has surged, the ease of doing business has improved, and the government’s fiscal position has been transformed by improved tax collection and the introduction of a national value added tax. 

The Indian rupee is also more resilient in the current Fed hiking cycle compared to prior cycles. A resilient currency in combination with increasing domestic demand and supply chain diversification has contributed to increasing manufacturing output and rising foreign direct investment. The services sector is broadening beyond IT consultancy into areas including financial, and legal services. From a risk perspective, India’s macro-economy is more robust, inflation has structurally declined, and geopolitics is less fraught due to India’s non-aligned stance.

Outside of China, we think the semiconductor industry is starting to recover, and an inflection point in terms of memory prices could occur as early as the third quarter of 2023. This presents opportunities for Taiwan and South Korea. Domestic battery companies in South Korea may also benefit from the US Inflation Reduction Act.

There seems to be a new optimism about Latin America, especially in the light of the commodity boom. How sustainable is that recovery?

In Latin America, market sentiment has turned to being positive as several countries embark on a journey of change. Expectations of a rate cut in Brazil, together with the gaining of traction of nearshoring opportunities in Mexico – where increasingly more sophisticated manufacturing and more technological-driven capabilities are relocating to – are also opportunities for growth in the region.

In July, all countries in the Latin American region also posted gains, with macroeconomic data taking centre stage in the region. Brazil’s government also introduced taxes on sports betting. Chile’s rate cut of 100 basis points introduced positive sentiment, sending local stocks higher.

Do EM investors need to think about income too in terms of wider capital returns? 

Although the current global outlook remains weak, economies with a greater focus on domestic demand are better placed to weather this in the near term. Many emerging markets such as China, India, Indonesia and Brazil have huge domestic consumption bases and are well-positioned to remain resilient from external demand shortfalls.

In addition, policy makers in several markets are providing incentives to manufacturing companies to expand operations in order to remain self-sufficient and competitive. For example, India is driving investments through its Production Linked Incentive program.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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James Gard

James Gard  is senior editor for Morningstar.co.uk


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