Emerging markets: US green spending, Chinese tech and a banking crisis

Three things the Franklin Templeton team are thinking about right now

1. Implications of liquidity crisis in selected developed market banks. The liquidity crisis impacting selected developed market banks has unnerved emerging market investors. In our view, the risk of contagion to emerging market banks appears low given higher capital levels and tighter regulation. Implications that we are thinking about today include the impact of lower US bond yields and rising risk aversion among providers of capital. Lower US bond yields could result in a weaker US dollar, which is good news for liquidity in emerging markets. However, rising risk aversion among banks and alternative providers of capital could reduce the availability of credit. In the coming months, investors need to monitor both factors to gauge the impact of the liquidity crisis in selected developed market banks on emerging markets.

2. Reorganisation among Chinese technology companies. With its provisions on the storage and transfer of data, the Chinese data security law, which came into force in 2021, affected technology companies. The impact of the law was initially negative, but managers of these companies and investors have since become comfortable with the law, which is similar in its provisions to the US CLOUD Act. The implications of the law partly drove China’s largest technology company to recently announce a corporate reorganisation, which the market received positively. Other Chinese technology companies could announce similar reorganisations to unlock value, resulting in more focused companies and investment opportunities.

3. Impact of US Inflation Reduction Act (IRA) on emerging markets. To benefit from the IRA, a country needs a free trade (FTA) or similar agreement with the United States. A quarter of the 20 countries that have a FTA are emerging markets, including Mexico, Chile and South Korea. Operating in a country without a FTA implies companies exporting to the United States cannot benefit from the subsidies offered for renewable energy or the electrification of transportation. This is particularly relevant for emerging markets supplying raw materials for batteries. Indonesia is the world’s largest supplier of nickel, a critical input to the production of batteries. The country is receiving increasing foreign direct investment on hopes of an agreement similar to that of Japan who recently signed with the US on critical materials for batteries. Commodity producers’ recent and planned initial public offerings are deepening Indonesian capital markets and raising the country’s profile among emerging market investors.