Emerging markets face brighter prospects in 2020

The US-China trade war tension may linger in the coming year but 2020 nonetheless offers brighter prospects for emerging markets on the back of greater monetary stimuli, an investment expert at global investment management firm Franklin Templeton said.

Manraj Sekhon, chief investment officer at US-based Franklin Templeton Emerging Markets, said in a Dec. 18 research note that while market sentiment in 2019 had been weighed down by easing growth concerns, emerging market growth would accelerate in 2020 as projected by the International Monetary Fund and remain more than double that of developed markets.

“Much noise and conflicting signals dominated 2019, which led many investors to limit their risk appetite and discount the long-term growth drivers in emerging markets. While some of these uncertainties may persist in the near term, we believe it is essential to stay the course,” Sekhon said.

“The markets are just beginning to realize opportunities from technology disruption and the transition of businesses away from traditional models. We believe the investment scope in the emerging world is wide and promising for investors who can overlook near-term volatility and invest for the longer term,” he added.

Sekhon pointed out that improving fiscal, economic and monetary policies and a renewed focus on structural reforms in many emerging markets had been gaining traction.

Supported by more conducive monetary policies in developed economies and easing inflationary pressures, central banks in emerging markets generally turned more dovish or biased for looser monetary policy in 2019. Sekhon expects this trend to continue in 2020, noting that policymakers have greater flexibility in stimulating economic activity.

Although US-China trade tensions have de-escalated in the short term on rising expectations of a partial trade deal and plans for both countries to scale back tariffs, Franklin Templeton expects the broader economic conflict to remain for some time.

The impact from the trade conflict has not been limited to China, he noted. While US imports from China over the last year declined by $35 billion to $497 billion, he pointed out that China’s imports from the United States had decreased by a larger amount —by $40 billion to $125 billion.

“Therefore, we believe a comprehensive agreement remains in the best interests of both sides. The Trump administration will be acutely aware of this heading into an election year,” he said.

Meanwhile, he noted that China’s initiatives to strengthen and diversify its economy had been largely overshadowed by trade and slowing growth fears. Sekhon said the government’s focus on economic restructuring and long-term sustainable growth had led to an acceleration in the implementation of structural reforms and widespread industry consolidation, as well as the development of local supply chains in the technology space to replace US sources.

He expects China to be a frontrunner in the 5G arena with some 600 million 5G subscribers by 2025, or about 40 percent of the projected 1.6 billion subscribers globally. “Together with artificial intelligence (AI) and robotics, this will help drive growth in China’s new economy as it strives to become less reliant on the United States. In our view, China will emerge stronger and more self-reliant with multiple pillars of economic support through this crisis,” he said.

Overall, he said the emerging market landscape continued to transform as policymakers focus on building resilience during times of stress.

“Emerging market economies are more diversified now—with domestic consumption and technology offering new drivers of growth—and are growing less reliant on low-cost manufacturing and commodities. Since the turn of the century, we have witnessed a significant increase in the trade value of high-tech goods being exported by emerging market countries,” he said.

“We have also seen how companies are using innovation and technology to leapfrog and disrupt traditional business models. Areas such as e-commerce, digital banking and mobile computing will be fundamental drivers of emerging markets for years to come. Equally, fields such as AI, autonomous driving, robotics and the internet of things continue to attract investment, signaling strong longer-term prospects.”