Should i invest in emerging markets now

Nor do they scale the trading costs and taxes involved in gaining access to these markets. An executive order issued by the White House in November brought these issues into focus. The order prohibits U. ETFs and mutual funds tracking those indexes followed suit. Risk presented itself in the form of forced sales, causing funds to incur transaction fees that they otherwise would have forgone. While not ideal, the impact on investors in broad emerging-markets funds should be limited, as these companies represented a small fraction of the affected portfolios.

But it serves as a reminder that emerging markets face incremental risks, as this historical montage demonstrates. One of the most recent and prominent examples of corruption in emerging markets came to light in late Executives at Brazil's state-owned oil company, Petrobras PBR , were caught in an intricate web of bribes and payments between the company's contractors, executives, and Brazilian politicians.

Harmful actions by crooked executives at emerging-markets firms are anything but novel. Russia was rife with these situations in the late s as its economy attempted a transition to a capitalist democracy. In late , investors discovered that Gazprom, Russia's state-owned natural gas behemoth, had sold off several major natural gas reserves to insiders, including its own executives and their families, at pennies-on-the-dollar.

Both of these firms have another distinguishing feature that increases risk. Petrobras and Gazprom are both examples of state-owned enterprises: companies that are partially or largely owned by their respective governments.

State ownership is far more prevalent in emerging markets than developed economies. State ownership increases risk because politicians' agendas don't always align with investors' interests. Corporations typically have a narrow objective of maximizing profits for shareholders, while governments' responsibilities include resource security, foreign policy, and social welfare, to name just a few.

Higher wages are likely good for workers and the local economy, but they crimp companies' profits. Energy stocks followed a similar trajectory because the Russian market has a substantial stake in the energy sector.

Timing could not have been worse as the move increased the fund's volatility when oil prices declined in and But for the last decade there has been a trend of improving free cash flows in both absolute terms and relative to developed markets that has accelerated in the last year.

Emerging market companies are generating much more free cash this year because both commodity-oriented and technology-oriented companies in particular the semiconductor industry have been doing well. As cashflows increase, we believe ultimately this will result in improved returns on equity for emerging market stocks and should likely propel a rerating. While we do see reasons to be optimistic, we should mention the near-term risks in our outlook.

Regulatory changes happening in China have ramifications for a number of industries and many internet related stocks in particular. This is impacting earnings power in the near term, and also potentially further into the future. We had expected with rising vaccination rates, mobility would automatically resume. In addition, a dramatic rise in freight rates has had a negative impact on margins for many export-oriented companies.

In sum, we believe the long-term fundamentals for emerging markets remain attractive despite near term headwinds, and that equities offer good potential for investors. While the economic recovery from COVID could be more muted going forward, growth remains historically strong, valuations appear cheap, and earnings prospects are supported by rising cashflows.

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.

Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.

China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested.

Past performance is not necessarily indicative nor a guarantee of future performance. Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice.

The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities if any is not a sufficient basis upon which to make an investment decision. News Corp is a global, diversified media and information services company focused on creating and distributing authoritative and engaging content and other products and services.

Dow Jones. By Dan Weil. To Read the Full Story. Subscribe Sign In. Continue reading your article with a WSJ membership.