Currency weakness not justified
Emerging market currencies rebounded in February. However, for some, weakness persists when compared to the victory of Donald Trump in November 2016.
For Stephen H. Dover, Chief Investment Officer of Templeton Emerging Markets at Franklin Templeton Investments, this currency weakness strengthens their case of investing in emerging markets.
He thinks that currencies of countries like Mexico, Argentina, Colombia, Indonesia, and Malaysia are unjustifiably weak. According to him, the levels at which currencies of these countries are trading can be considered distressed-levels, a situation which should only arise if their economies are in grave danger.
The Templeton Emerging Markets Group believes that “the fundamentals in these countries look much better than their currency prices are reflecting.”
Economic and earnings growth positive factors as well
The Group also expects inflation to fall in countries like Brazil, Russia, Colombia and Nigeria, allowing their respective central banks to take an accommodative stance with their monetary policies which can benefit both economic activity as well as local equities.
According to the International Monetary Fund, GDP (gross domestic product) growth in emerging and developing countries is projected to be 4.5% in 2017 versus 1.9% expected for developed nations. The same is shown in the graph above.
Meanwhile, the Templeton Emerging Markets Group sees “evidence that earnings growth in emerging markets could likely be higher than in developed markets, too.” Though they have lagged developed economies in this aspect, the Group noted that 2016 was the first time in over five years that they did better than their developed peers.
The US to help too
Dover says that “history has shown us that in general, a strong US economy is positive for emerging markets. Even if we do see some reduction in trade on a marginal level, we think an expansion in the global economy is likely to help emerging markets.”
Further, emerging markets that rely on domestic consumers for driving economic growth can expect to be better insulated to external shocks, thus making them an interesting investment avenue.