Emerging markets: a decade of surprises and more to come

Emerging markets economies will maintain their rapid pace of development in coming years, with growing affluence and consumerism, greater digitalisation of products and services, the continuing rise of China and the greening of energy markets as the key themes, says fund manager Martin Currie in a major review of the sector.

Martin Currie, a specialist investment manager of Franklin Templeton, is celebrating the tenth anniversary of the Martin Currie Emerging Markets Fund in Australia and has produced a white paper looking back at the past decade and forward to likely developments.

Alastair Reynolds, Martin Currie Portfolio Manager and Head of Emerging Markets Team, says the most significant change over the 10 years the Fund has operated was the growing prominence of China within the asset class.

“A decade ago, my expectation was that we’d see more broad-based growth from across the BRIC nations, but China has really been the standout, doubling its representation in the MSCI Emerging Markets Index to 34 per cent,” Reynolds says.

“Developments in the Chinese economy and its trade relations will continue to be important. Chinese companies have exceeded our growth expectations. For example, when we first seriously considered Tencent for investment in 2013, we predicted that it would quadruple sales over the period to 2020. It has grown at double that rate.”

Another big change is that the traditional investment case for emerging markets, heavily centred on physical resources and cheap labour, is no longer valid. Emerging markets economies have shifted towards the service industries. IT and consumer sector weights in the benchmark index have doubled, and IT companies now make up the largest sector allocation within the Fund’s portfolio.

“A trend that resonates across emerging markets is digitalisation. Think of the power of the smartphone and what you can achieve daily with that product. Behind that are fantastic opportunities for many, many emerging markets companies,” Reynolds says.

“A good example is one of our portfolio companies, Taiwanese semiconductor manufacturer TSMC. Over the past decade the company has moved up the value chain to become an IP leader, taking advantage of the many developments in digitalisation. It epitomises the emerging markets opportunity.”

Digital is front and centre in the financial sector and some of the best financial sector intellectual property has come out of emerging markets.

Ten years ago, the Fund’s financial holdings were mostly banks. Today the financial holdings look very different, and include microfinance companies and digital banks, such as Russia TCS Group.

Looking ahead, digitalisation is one of the most powerful trends driving change and creating opportunities within the emerging markets asset class.
“As an investor, we have approached that trend with a focus on sustainable growth. This investment philosophy has supported strong stock performance and we continue to apply it,” Reynolds says.

“What I see in the 10 years ahead is the strong role emerging markets companies will play in decarbonisation and the pathway to net-zero. Companies in China, South Korea, Taiwan and Chile are already prominent in aspects of the electric vehicle market, especially in battery manufacture,” Reynolds says.

As the risks and challenges in emerging markets have changed, so too has Martin Currie’s approach to ESG and engagement. It partners with companies and advises them on their ESG journey, a process that is enhanced by its long-term approach to investing.

Peruvian financial group Credicorp has been in the portfolio since the Fund was launched. Early in the relationship, Martin Currie introduced senior management to best banking practice in other markets. This led to a group sustainability review and a benchmarking exercise, resulting in Credicorp adopting the Equator Principles, a framework for managing environmental and social risk in project finance.

“More recently, our engagement has been focused on the level of technological expertise within senior management and the board. The bank’s receptiveness to our feedback and willingness to improve its
ESG credentials has been central to our strong conviction in its prospects,” Reynolds says.

With so many major developments in train, the strategy has a very exciting future, he notes.

Key Facts about Martin Currie Emerging Markets Fund

Investment Objective: The Fund aims to deliver capital growth by investing directly or indirectly in equities of companies that are quoted in or operating in one or more countries deemed to be emerging markets. The
Fund aims to generate after fee returns in excess of the MSCI Emerging Markets Index expressed in Australian dollars over rolling five-year periods.

Fund Highlights:

• A high-conviction portfolio of the best emerging market companies identified by Martin Currie’s fundamental bottom up research process
• Focuses on companies where the investment team believes long-term growth prospects are not yet reflected in their stock prices
• Flexible portfolio construction as investments are not restricted by market cap, country or sector limits

Performance (AUD %, net of fees) As at 30 September 2021

	1Yr	3 Yrs	5 Yrs	10 Yrs	Since Inception (08/09/2011)
Martin Currie Emerging Markets Fund	17.38	12.60	13.96	10.51	9.77
MSCI Emerging Markets Index (AUD)*	17.28	8.64	10.50	9.28	8.70

*Benchmark

Past performance is not an indicator nor a guarantee of future performance.

Further information on the Fund is available here.

About Franklin Templeton
Franklin Resources, Inc. [NYSE:BEN] is a global investment management organization with subsidiaries operating as Franklin Templeton and serving clients in over 165 countries. Franklin Templeton’s mission is to help clients achieve better outcomes through investment management expertise, wealth management and technology solutions. Through its specialist investment managers, the company brings extensive capabilities in equity, fixed income, multi-asset solutions and alternatives. With offices in more than 30 countries and approximately 1,300 investment professionals, the California-based company has over 70 years of investment experience and over A$2.1 trillion in funds under management as of 30 September 2021.

About Martin Currie
Based in Edinburgh, Scotland, Martin Currie is a global active equity specialist with leading credentials in sustainable investing, crafting high-conviction portfolios for client-focused solutions. It had US$22.5 billion in assets under management as of 30 June 2021. Investment excellence is at the heart of its business. Central to its philosophy is a stock-driven approach, based on in-depth fundamental research, active ownership and engagement and skilled portfolio construction. Martin Currie is rated A+ in all three categories under the Principles for Responsible Investment (PRI) 2020. As a Specialist Investment Manager of Franklin Resources Inc., it also has the backing of one of the world’s largest asset management firms. Please visit martincurrie.com.

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For more information, please visit www.franklintempleton.com.au

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This publication is issued for information purposes only and does not constitute investment or financial product advice. It expresses no views as to the suitability of the services or other matters described in this
document as to the individual circumstances, objectives, financial situation, or needs of any recipient. You should assess whether the information is appropriate for you and consider obtaining independent taxation, legal, financial or other professional advice before making an investment decision.

Please read the relevant Product Disclosure Statements (PDSs) and any associated reference documents before making an investment decision. In accordance with the Design and Distribution Obligations and Product Interventions Powers requirements, we maintain Target Market Determinations (TMD) for each of our Funds. All documents can be found via www.franklintempleton.com.au or by calling 1800 673 776.

Issued by Franklin Templeton Australia Limited (ABN 76 004 835 849, AFSL 240827). Franklin Templeton Australia Limited as Responsible Entity has appointed Martin Currie Investment Management Limited as the fund manager of the Martin Currie Emerging Markets Fund (ARSN 147 940 467).

Past performance is not an indicator nor a guarantee of future performance. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance.

The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the securities discussed here were or will prove to be profitable.

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