Editing Templeton Emerging Markets Investment Trust (section)

== Market outlook: Tough global investment backdrop<ref name=":2" /> ==
Over the last five years, emerging markets shares have performed broadly in line with the UK stock market, but have meaningfully lagged the MSCI World Index, particularly since early 2021 (Exhibit 1, left-hand side – all indices shown in sterling terms).The current tough investment backdrop is characterised by rising interest rates in response to supply-chain bottlenecks, which are leading to higher prices, and are being exacerbated by the war in Ukraine and China’s zero-COVID policy. These uncertainties are leading to increased risks to economic growth and corporate earnings, which unsurprisingly has translated into a period of elevated stock market volatility. However, for investors with a longer-term perspective, an allocation to high-quality emerging market stocks may prove beneficial.

These regions offer the potential for above-average GDP growth; in its April 2022 update to its World Economic Outlook, the International Monetary Fund forecast growth of 3.8% for 2022 and 4.4% for 2023 in emerging market and developing economies compared with 3.3% and 2.4% respectively for advanced economies. An important reason for higher emerging market economic activity is a growing middle class in these regions, which is driving increased demand for consumer goods, such as autos and appliances, and services, including education and healthcare. Global climate change is gaining more attention, leading to developments in areas such as renewable energy, battery storage and electric vehicles, and these operations are not restricted to developed economies. In addition, ongoing political tensions, including between the United States and China, are causing multinational businesses to reconsider their supply chains. As an example, Vietnam is a beneficiary of this trend as the country is now home to the majority of Samsung’s smartphone manufacturing.

As well as above-average growth potential in emerging markets, in aggregate, stocks listed in these areas look relatively attractively valued. Shown in Exhibit 1 (right-hand side), the Datastream Emerging Market Index is trading at an 11.4x forward P/E multiple, which is a 17.3% discount to its five-year average. It is also trading at a 15.0% discount to the Datastream World Index, albeit modestly lower than the 15.6% average discount over the last five years.

'''Exhibit 1a: Performance of indices in £ (last five years)<ref name=":0">Source: Refinitiv, Edison Investment Research, MSCI.</ref>'''

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'''Exhibit 1b: Valuation of Datastream Emerging Market Index (at 23 June 2022)<ref name=":0" />'''

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