Templeton Emerging: End of US exceptionalism spells good news for EM

Tariffs will cause investors to diversify away from the US, creating tailwinds for emerging markets, according to Templeton Emerging Markets duo.

Templeton Emerging Markets (TEM ) managers Andrew Ness and Chetan Sehgal believe US tariffs could create unexpected tailwinds for emerging markets. 

In Ness and Chetan’s opinion, if tariffs are implemented for an extended period, a steady stream of investors will continue to diversify away from the US. The duo said this would ‘put into question US exceptionalism’ and could put pressure on the dollar this year. 

‘In tandem, valuations, currency and fund inflows should act as tailwinds for emerging markets,’ they explained, in annual results released last Friday. 

Over the 12 months to the end of March, TEM grew its net asset value (NAV) by 8.8%, while the shares rose 13.3%. By contrast, the MSCI Emerging Markets index was up 5.8%. 

The portfolio’s strong relative performance recently saw Ness and Chetan win Citywire AAA ratings for the first time. 

The £2.1bn trust currently sits at a 12% discount, which the board is seeking to narrow via planned buybacks worth between £100m and £200m, equating to 8.1% of the share capital over the next two years. They have also proposed a conditional performance related tender. 

While US president Donald Trump sent global markets into a tailspin in early April with his ‘liberation day’ announcements, Ness and Sehgal are balancing ‘uncertainty with optimism in pockets of our investable universe’.

‘We continue to remain overweight on equities in Latin America; and in particular, Mexico and Brazil, as the region has been spared from the harshest tariffs,’ the managers explained.

‘Mexico will also benefit due to its geographical proximity to the US. The outlook for Brazilian equities looks to be on the mend as we expect Brazil to eventually reduce interest rates.’ 

Overall, they expect tariffs will lead to slower economic growth and inefficiencies globally. 

TEM’s largest exposure is China, although it is underweight relative to the benchmark. Here, Sehgal and Ness are sceptical of the benefits of Chinese government policies over the longer term.

‘Reviewing the macroeconomic background, we have not yet observed any meaningful change in demand; and the declining and ageing population remains a key structural challenge,’ they said.

The trust’s Chinese exposure is dominated by internet companies, which in the managers’ opinion provide an additional degree of comfort on account of their cash flows and high shareholder returns.

Performance drivers

The top contributor over the 12-month period was Prosus, the global investment company and largest shareholder of Chinese tech leader Tencent. 

Its share price tracked that of Tencent’s, buoyed by a slew of stimulus measures in China and investor enthusiasm for Chinese tech companies following breakthroughs in the country’s AI capabilities. 

Also finishing strong over the 12 months were shares of Chinese e-commerce company Alibaba. 

South Korea-based Samsung SDI, a manufacturer of lithium ion batteries for electric vehicles, was a detractor over the period due to weak demand and loss of market share with its key clients. 

Xiaomi, BYD and LG Corp, all in the EV supply chain, performed badly, as did semiconductor memory manufacturer Samsung Electronics, which the managers said ‘seems to have lost its technological leadership in the memory segment and is lagging in the advanced chips being used for AI servers.’ 

Over the past three years, TEM’s shares are up 30.3% which compares to 27% by the average trust in the AIC’s global emerging markets sector.