Three things we are thinking about today
- China plays catch-up: Chinese startup DeepSeek has sparked a wave of renewed optimism for domestic technology stocks. China’s progress toward technological self-reliance comes even as the country is denied access to advanced chips.
Share prices of Chinese internet companies reacted positively to announcements of developments in artificial intelligence (AI). This refreshed attention also came as China’s president held a meeting with large domestic technology companies. This seems to mark a turnaround from the regulatory crackdown on technology companies four years ago.
- European geopolitical tensions in limbo: US President Donald Trump has attempted to push for a peaceful resolution to the conflict in Ukraine. However, a heated exchange between the presidents of both the United States and Ukraine ensued. At the time of this writing, the European Union (EU), United Kingdom and Ukraine were drafting a Ukraine peace plan. This comes as Israeli and Hamas officials are negotiating to keep their ceasefire intact.
- A breather for Indian consumer stocks: Slowing consumption has weighed on Indian consumer stocks in recent months. Consumption stocks rallied after the Indian budget announcement, which was positive overall for shoring up urban consumption. This budget appears to make very few errors in the path to sustain India’s growth, which was slower than expected in recent quarters.
Outlook
On the heels of a weak equity market in Brazil, some of Franklin Templeton’s portfolio managers visited the country. This group met the management teams of some Brazilian-based companies, but they also gleaned some insights outside of work engagements.
Current interest rates in Brazil are higher than what our portfolio managers collectively expected a year or two ago. A meeting with some traders and an economist at an investment bank in Brazil echoed similar sentiments. They felt that the economic challenges that the country faced could be easily solved. However, the government had created more concerns about the country’s fiscal trajectory rather than convince investors of fiscal sustainability and credibility. This has led to the current interest-rate backdrop.
However, during our visit, we realized that there are no apparent signs of softening demand, which normally happens during periods of high interest rates. This anomaly is due to government spending and low unemployment. Trade data confirms this: Brazil’s imports rose 9% in 2024 from a year earlier, buoyed by strong domestic demand and increased investments. Foreigners also contributed to this increase in demand, due to the Brazilian real coming under stress. One of the portfolio managers—based in Edinburgh—commented that, in contrast to his previous visits to Brazil, his experience this time (food, hotels) felt less expensive.
In all, the group’s conclusion from the visit is that Brazil is far from an economic crisis, but interest rates have to be higher for longer. High rates could help battle inflation. This could lead to a scenario where the central bank could then look to ease interest rates in the six-month run-up to 2026 elections, which would become a political advantage.
Market review: February 2025
Emerging market (EM) equities rose marginally in February 2025. Geopolitics and tariff news featured heavily in the month. The US president announced his intentions to impose additional tariffs and also made efforts to end the Russia-Ukraine conflict, although a peace deal now remains uncertain. For the month, the MSCI EM Index returned 0.50% while the MSCI World Index fell 0.69%.
The emerging Asia region saw gains. Chinese equities performed well despite the possibility the United States would impose additional tariffs. The advancement of AI in China, despite efforts by the United States to limit the development of sophisticated technology in China, sparked a wave of optimism for China’s ability to innovate. Several internet companies also announced their AI development plans. Indian equities continued their descent, despite a long-anticipated reduction in India’s interest rates—the first reduction since 2020. Investor concerns surrounding US trade tariffs and uncertainty around future US interest-rate cuts caused Indian equities to continue sliding. However, Indian consumer stocks reacted positively and rose after India’s government revealed its budget.
South Korean and Taiwanese equities fell as they succumbed to fresh tariff threats from the United States. In particular, the share prices of South Korean steelmakers slid after the announcement of US tariffs on all steel imports into the United States. Both central banks reduced their economic growth forecasts for 2025.
Equities in the emerging Europe, Middle East and Africa region edged higher. The initial potential for a de-escalation in geopolitical tensions, this time from a truce in Ukraine, lent support. This could reduce commodity prices and inflationary pressure. However, Saudi Arabian equities experienced losses on weak corporate earnings.
Equities in the emerging Latin America region slipped. The central banks of Brazil and Mexico cut their economic growth forecasts for 2025. Inflationary environments were also similar for both economies, with annual inflation rates slowing in January from the previous month. Mexico’s central bank also reduced its benchmark interest rate. The United States confirmed that tariffs on Mexico will come into effect in early March, with the amount to be determined.
Index Definitions
- The MSCI Emerging Markets Index is a free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of global emerging markets. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
- The MSCI All Country World Index is a free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of global developed and emerging markets. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
- The MSCI EM Latin America Index captures large- and mid-cap representation across five emerging markets (EM) countries in Latin America. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
- The MSCI Emerging Markets EMEA Index captures large- and mid-cap representation across 11 emerging markets (EM) countries in Europe, the Middle East and Africa (EMEA). Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
- The MSCI EM Asia ex Japan Index captures large- and mid-cap representation across two of three developed markets (DM) countries (excluding Japan) and eight emerging markets (EM) countries. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
- The MSCI China Index captures large- and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g., ADRs). Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
- The MSCI Emerging Markets ex-China Index captures large- and mid-cap representation across 23 of the 24 Emerging Markets (EM) countries* excluding China. With 672 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
- The MSCI Mexico Index is designed to measure the performance of the large and mid cap segments of the Mexican market.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.