Franklin Templeton: Emerging Markets Can Weather the US Rate Tightening Cycle

The current period of rising rates and declining markets is unnerving, but it is also creating opportunities. The Franklin Templeton Emerging Markets Equity team believes in taking a long-term view and doing bottom-up research; searching for companies that have sustainable earnings growth, trade at a discount to intrinsic worth and have competitive advantages which are persistent and repeatable over time. In the current market decline, we observe many companies with these characteristics. This is creating opportunities for our investment team to increase exposure to these companies in preparation for the eventual recovery.

Key Takeaways

• Developed market (DM) central banks have started to raise interest rates, led by the Bank of England.
• Emerging market (EM) fundamentals are better in the current tightening cycle compared to history.
• The current and 2015 US rate hiking cycles have similarities for EM equities, based on economic and market fundamentals. In the 12 months after the first US rate hike in December 2015, the MSCI Emerging Markets Index rose 10%.
• In the five previous US rate hiking cycles, the MSCI Emerging Markets Index on average performed better in the 12 months prior to the first US rate hike than in the 12 months following; nevertheless, the gains in the latter period remained positive.

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