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Emerging markets outlook: Shaping the next decade

As we embark upon a new year, the Templeton Emerging Markets Group believes 2014 could be an important year for many emerging markets, possibly establishing trends that could play out through much of the remainder of the decade. In particular, Chinese government reform initiatives announced in late 2013 could have far-reaching significance. And major elections in a number of countries in 2014 could bring dramatic (or not-so-dramatic) changes. Here are a few themes and countries we’ve got our eye on in the New Year.

China’s blueprint

In November, China announced a new blueprint for its future, known as The Decision. There were some 60 proposals across a gamut of issues which could have dramatic consequences in areas including healthcare and social security, justice and the rule of law, intellectual and physical property rights, banking and monetary policy, as well as environmental protection.The proposed changes, intended to facilitate sustainable economic growth in China, could also create substantial opportunities for investors.

Reforms to state-owned enterprises aimed at improving their professionalism and efficiency in resource usage could benefit their listed subsidiaries. Measures aimed at encouraging enterprise and innovation, as well as blocking unfair competition, could speed up the process of rebalancing the economy away from investment-led growth and toward a more entrepreneurial, consumer-focused and service-oriented model.

The project has a decade-long time frame, but we nevertheless expect to see some progress in 2014, perhaps through initiatives in free trade zones such as the one announced for Shanghai in late 2013 and others hinted at in the proposals. Of course, there are likely to be market casualties as a result of these reforms. Companies facing intense competition and now deprived of the level of government support obtained in the past could be negatively impacted. We believe active management is critical in this environment to help spot the pitfalls that could emerge for some companies.

Potential in Southeast Asia

We believe many emerging markets, in addition to China, possess considerable economic growth potential. For example, Southeast Asia has seen a notable extension of growth and wealth away from traditional economic hubs, with previously underdeveloped regions starting to see significant catch-up growth. Thailand is most notable in this regard, as the reforms instituted by former Prime Minister Thaksin Shinawatra have resulted in more money going to the countryside and areas outside Bangkok.

While the country is currently facing some political turmoil, which continues to present near-term risk to the Thai market, our long-term view on the country remains positive. From our experience, Thailand has a history of being incredibly resilient. The country has gone through a number of political incidents over the past decade, and every time it has managed to recoup and bounce back. We don’t see it being different this time. Any political party has to satisfy the masses; Thailand’s leadership is no exception. We will continue to monitor the situation closely, but we think Thailand will eventually find its way out of this current turmoil. In our view, the fundamentals, the basic structure of the society and the investment case for Thailand remain strong.

Around the globe

On the African continent (which is generally considered a frontier market) we have continued to see some companies thriving in Egypt despite some turmoil there, and have therefore maintained our interest there even though the news headlines have sometimes been alarming. Egypt is a big country with a big population, and is a leader in the Middle East given its strategic and geopolitical importance. If Egyptians opt to have free and fair elections again under controlled conditions—and with a change in the constitution to prevent one party from dominating, then I think the future could be bright.

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