EMERGING MARKETS Find out which sectors in emerging markets are the cheapest

Find out which sectors in emerging markets are the cheapest

A tough start to 2022 has put pressure on stocks in developing economies

Acombination of factors, including a strong US dollar, have held back emerging markets in the first half of 2022.

For several reasons a stronger dollar is not typically good news for emerging markets. When the US currency strengthens, money invested in other parts of the world, including developing economies, often finds its way back to the relative safe haven of the US.

Second, and perhaps more importantly, many emerging markets have dollardenominated debts which become more expensive to service as the relative value of their domestic currencies drops.

With many commodities priced in dollars, these become more expensive to import, contributing to inflation. Though in the case of net commodity exporters like South Africa, Saudi Arabia, Brazil and Indonesia this can have a beneficial impact.

The difficult backdrop has been reflected in falling market valuations, but which sectors are particularly cheap?

A look at the MSCI Emerging Markets Value index provides some insights. The index includes stocks which meet certain criteria based on book (or net asset) value to price, the multiple of forecast earnings and dividend yield.

As at 30 June 2022 this collection of 806 stocks offered a yield of 4.6% and traded on a forward price to earnings ratio of 8.2 times compared with the wider MSCI Emerging Markets index where the corresponding figures were 3.1% and 10.9 times respectively.

Financials is the largest sector in terms of weighting, followed by information technology and consumer discretionary.

MSCI Emerging Markets Value – sector weightings

Real estate 2.95% (3.0%) Utilities (3.8%) Consumer staples (4.1%)

Industrials (5.6%) Health care (2.2%)

Financials (29.3%)

Communication services

(5.8%)

Energy (8.1%)

Materials(10.6%)

Chart: Shares magazine • Source: MSCI, data to 30 June 2022

Information technology

(13.8%)

Consumer discretionary

(13.6%)

This outlook is part of a series being sponsored by Templeton Emerging Markets Investment Trust. For more information on the trust, visit here

Emerging markets: Views from the experts

Three things the Franklin Templeton Emerging Markets Equity team are thinking about today

1. Chinese equities, as represented by the MSCI China index, rebounded from May 2022 lows on optimism the economy should rebound as Covid-19 restrictions are eased. China’s closed-loop system for factories has helped to partially mitigate the negative consequences of restrictions on movement. This has had a positive effect on high value-added industries, including semiconductor and vehicle manufacturing, which have been able to operate throughout the recent Covid-19 outbreaks. Leading indicators, including the Caixin China General Services PMI (purchasing managers’ index), rebounded in May, and are expected to continue to recover in the coming months. Consensus expectations are for further interest-rate cuts, which in combination with potential further weakness in the renminbi could ease financial conditions and support a recovery in gross domestic product growth toward the government’s target of 5.5%. 2. The shape of a yield curve is often viewed as an economic growth proxy. A steep yield curve indicates optimism over the growth outlook and a flat or inverted curve indicates pessimism. The US yield curve has recently flattened; if it were to tip into negative territory, it could be a negative signal for the economy and global markets. Factors we are monitoring that could influence the future shape of the US yield curve include US interest rates, oil price trends and financial conditions.

3.The upcoming earnings season is expected to show weak earnings growth in the first half of 2022 in emerging markets. However, we believe markets have already discounted this outcome and the primary focus is expected to be on guidance for the second half of 2022 and 2023. Consensus expectations are for 9% growth in emerging market earnings in 2023, in line with where forecasts were at the start of the year. Rising borrowing costs and increasing inflation are a risk to earnings, but healthy consumer balance sheets and a robust labour market signal demand and, in turn, future earnings growth may prove to be resilient.

TEMPLETON EMERGING MARKETS INVESTMENT TRUST (TEMIT) Porfolio Managers

Chetan Sehgal Singapore

Andrew Ness

Edinburgh TEMIT is the UK’s largest and oldest emerging markets investment trust seeking long-term capital appreciation.