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Jul 16, 2017 12:32 PM IST | Source:

India still faces bureaucratic barriers, but there is potential case for investing: Mark Mobius

Challenges in the implementation of the Goods and Services Tax (GST) and profit-taking cooled the Indian market in June, but India’s market remains quite strong year-to-date.

Emerging-market (EM) stocks outperformed their developed-market counterparts for the sixth consecutive month in June, with the MSCI EM Index returning 1.1 percent, compared with a 0.4 percent gain in the MCSI World Index.

For the quarter as a whole, the MSCI EM Index was up 6.4 percent, while the MSCI World Index was up 4.2 percent. Key drivers of emerging-market performance included encouraging economic data in China, investor inflows and corporate earnings growth.

Frontier markets outperformed developed markets and performed in line with their emerging-market counterparts. The MSCI Frontier Index gained 6.3 percent in US-dollar terms over the quarter. Nigeria, Sri Lanka and Kenya were among the top-performing frontier markets.

An improvement in foreign-exchange liquidity coupled with undemanding valuations drove stock prices in Nigeria. However, equity prices in Bahrain and Oman declined.

Emerging-market currencies appreciated slightly against the US dollar. Central European currencies such as the Czech koruna, Hungarian forint and Polish zloty were among the top-performing currencies as the stronger euro offered support. Meanwhile, the Argentine peso, Chilean peso and Russian ruble depreciated.

Key Developments:

Generally disappointing first-quarter corporate earnings weighed on equities in Thailand, while the materials, telecommunications and energy sectors underperformed in Malaysia. Despite posting gains, equity markets in Thailand, Malaysia and India lagged their regional peers.

Challenges in the implementation of the Goods and Services Tax (GST) and profit-taking cooled the Indian market in June, but India’s market remains quite strong year-to-date.

Moderating inflation data in June opens the door to potential central-bank easing, and we believe the implementation of the GST should benefit many companies.

While India still faces some bureaucratic barriers, we are optimistic about India’s potential and the case for investing there.

Our Outlook:

We believe emerging markets continue to offer superior growth potential compared with developed markets. The long-term trend of increased consumer penetration and improving affluence, leading to a shift to more premium products and services, should continue to bode well for these markets in the future.

Consumer demand growth is a prominent investment thesis within our portfolios. We look for opportunities in areas relating to consumer products. These include consumer staples, retailing, and discretionary purchases such as automobiles.

We also look for opportunities in services such as consumer finance where we see companies we think can achieve high growth rates and sustainable profits.

Technology is another major investment theme. Many emerging-market companies have become leading players in the adoption and development of technology, and IT has outperformed other emerging-market sectors in the second quarter and first half of 2017.

Although we are cautious of the share-price advances in some Internet stocks, we continue to see value in the sector across emerging markets as a whole. Our focus is on earnings sustainability as a result of innovation, dominant platforms or technology.

In addition to Internet companies, which stand to benefit from the move toward more online transactions, we see potential for attractive long-term investment opportunities in many other areas.

These include: shopping, targeted advertising, gaming and other services, graphic processing units for data centers and artificial intelligence applications, and connectivity and processor integrated circuits for autonomous cars and devices related to the “Internet-of-Things.”

In the memory segment, smartphones have been upgrading memory content for better performance, which has helped drive demand for and pricing of dynamic random access memory (DRAM) chips. Demand for DRAM chips from data centers is also picking up, which we think should further support prices.

Valuations Remain Attractive

In terms of valuations, as of the end of June, the MSCI EM Index had a trailing price-to-earnings ratio (P/E) of 14.9x, a price-to-book value (P/B) of 1.7x and dividend yield of 2.4%. That compares with a P/E of 21.5x, P/B of 2.3x and dividend yield of 2.4% for the MSCI World Index.1

We are of the opinion that the fundamentals of emerging-equities remain attractive. However, we are cautious on certain developments that may generally emanate from any possible “black swan” event—that is, a major shock that can’t be predicted.

China is a dominant country within emerging markets, both as a market and a demand-driver for many industrial commodities. Any slowdown in China and derailment of its structural adjustment process could have short-term implications for sentiment toward emerging markets as a whole.

On a broader level, the world is still imbalanced. Many countries have high debt levels, and concerns surrounding that and other macroeconomic factors could lead to short-term volatility.

Disclaimer: The author is Executive Chairman, Templeton Emerging Markets Group. The views and investment tips expressed by investment experts on Moneycontrol are their own and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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