Brazil, Argentina, Colombia, and Indonesia,
among others. Despite market apprehension
that protectionist US policies could damage
global trade, several EMs have already weathered severe shocks over the last year and are
far more resilient to potential increases in
trade costs at the margin than markets have
indicated. In fact, several EMs have significantly improved their resiliencies over the last
decade by increasing their external reserve
cushions, bringing their current accounts into
surplus or close to balance, improving their
fiscal accounts, and reducing US-dollar liabilities. Markets have tended to overplay the potential US policy factors and under-recognize
the more important domestic factors within
the countries, in our opinion.
Specifically in Latin America, we are optimistic about the turnaround stories in Brazil and
Argentina, and about the boost of growth in
Colombia. Ironically, as populist political risks
rise in Europe and the US, countries such as
Brazil and Argentina have recently turned
away from previous failed experiments with
populism and have moved toward more orthodox policies, taking pro-market and fiscally
conservative approaches while maintaining
credible monetary policy, proactive business
environments and pro-trade regimes.
Indonesia is also a strong example of EM resiliency. Commodity prices collapsed, trade
volumes declined and China’s growth moderated, yet Indonesia’s economy has still been
growing at 5%, with a balanced current account (including FDI). Additionally, even as
2016 saw widespread depreciation in EM
currencies there have been no solvency issues
for sovereigns like Indonesia. Twenty years
ago, it would have been more difficult for EM
countries to weather simultaneous shocks to
trade, commodity prices and exchange rates.
Yet today these countries are in much stronger positions to handle macro shifts and the
changes to global trade dynamics.
FOREIGN CAPITAL APPEARS TO BE
RETURNING TO EMERGING MARKETS
Overall, we continue to see a subset of EMs
that we think have excellent value and better
underlying fundamentals than markets have
indicated. In recent months, markets have
appeared to come around to a similar view as
investors have incrementally returned to the
asset class. A lot of foreign capital had exited
those markets in recent years—when it flows
back in, the valuations in those asset catego-
ries tend to recover quickly. In our view, we
are still at the early stages of foreign capital
returning to emerging markets, but we see
a lot of upside potential ahead, particularly
for select local currency exposures in specific
areas of Latin America and Asia.
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation to buy, sell or hold any security or to adopt any
investment strategy. It does not constitute legal or tax advice. The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at the
publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.
All investments involve risks, including possible loss of principal.
Data from third-party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited
such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions, and analyses in the material is at the sole
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2005 2007 2011 2009 2013 2015 2017
-19% below 2002 levels
-25% below 2009 levels
For illustrative and discussion purposes only. Past performance is not an indicator or a guarantee of future
performance. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees,
expenses or sales charges. Source: J.P. Morgan Chase & Co., as of 5/31/2017. Important data provider notices and
terms available at www.franklintempletondatasources.com.
J.P. Morgan Emerging Markets Currency Index
As of May 31, 2017
Michael Hasenstab, Ph.D.
Executive Vice President,
Portfolio Manager, Chief Investment Officer
Templeton Global Macro
Sonal Desai, Ph.D.
Senior Vice President,
Portfolio Manager, Director of Research
Templeton Global Macro