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Templeton Emerging Markets Investment Trust
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== The fund managers: Chetan Sehgal and Andrew Ness<ref name=":2" /> == === The managers’ view: Adapting to the new realities === Ness comments that inflation is a global phenomenon and the magnitude of higher prices varies within emerging markets; for example, Chinese inflation at 2% is below target so interest rates are coming down, while in India interest rates are rising as its 7% inflation rate is above target. He does believe, however, that in a year’s time ‘we will not be thinking so much about inflation, more likely the concern will be about economic growth’ and suggests TEMIT’s portfolio is not biased to any particular market outcome. The manager notes that a strengthening US dollar is adding to higher energy costs and with India having low per-capita income, the pain of rising inflation and interest rates is greater there than in some other emerging market countries. Ness suggests policy choices are difficult in India ahead of the 2024 general election. Sehgal comments that the macroeconomic environment is ‘tough’. He says he and Ness need to try to understand how sustainable this current backdrop is and what is already priced into stocks. The manager suggests that if the US 10-year government bond yield has peaked, there is a fair case to be made for emerging markets; however, if bond yields continue to rise, he believes everything will come into question and, if so, global equities will come under further pressure. In this scenario, he opines that emerging market stocks could actually do relatively better than those listed elsewhere given the emerging regions are home to the lowest-cost commodity producers and have higher economic growth prospects. Whatever the outcome, the managers are sticking to their strategy of investing in companies with sustainable earnings power that are trading at a discount to their estimated intrinsic worth. However, Sehgal says they ‘also have to factor in the new realities of rising interest rates, China’s zero-COVID policy, the war in Ukraine and climate change’. The manager comments that the message from company meetings is that most firms’ fundamentals are intact, but managements are acknowledging that a slowdown is coming. He suggests ‘there is still a gap between investors’ perception and companies’ relative optimism’ and this valuation gap needs to close. Sehgal says ‘a good deal of China’s growth potential is within its own destiny’. Chinese authorities have implemented some changes to slow the economy down and reduce leverage; however, the manager considers the zero-COVID policy to be a challenge. He says it is very difficult to see when the Chinese economy will open up, believing ‘2022 is unlikely, so maybe in 2023’. Sehgal suggests an economic slowdown in the West would reduce the demand for Chinese exports, and Russia had been a large export market for Chinese goods, so he thinks it is hard to see how things will normalise and what will ultimately become structural, rather than cyclical issues. Sehgal cites a quote from the well-regarded investor Sir John Templeton, who said ‘bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria’. The manager suggests that, given the current level of pessimism, ‘now is probably a good time to buy stocks’. He says that along with investors, companies are responding to the macroeconomic backdrop, so there may be some upside to earnings estimates. Sehgal reports that there are both upward and downward estimate revisions; for example, downward revisions for some Chinese companies due to COVID restrictions, but other companies such as Taiwan Semiconductor Manufacturing Company (TSMC) and Guangzhou Tinci Materials Technology have surprised to the upside.
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