Analysis: 2014 is a trendsetter for emerging markets

Chinese government initiatives announced late last year could have far-reaching significance. The proposed changes, intended to facilitate sustainable economic growth in China, could also create substantial opportunities for investors.

We believe this year could be an important year for many emerging markets, establishing trends that could play out through much of the remainder of the decade.

In particular, Chinese government initiatives announced late last year could have far-reaching significance. About 60 proposals across a gamut of issues could have dramatic consequences in areas including health care and social security, justice and the rule of law, intellectual and physical property rights, banking and monetary policy, and 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 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 towards a more entrepreneurial, consumer-focused and service-oriented model.

The project has a decade-long timescale, but we nevertheless expect to see some progress thisyear, perhaps through initiatives in free trade zones such as the one announced for Shanghai and others hinted at in the proposals.

Of course, there are likely to be 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 affected. We therefore need to keep our eyes open to avoid such situations.

A number of large emerging markets will see major elections this year – Indonesia, South Africa, Thailand and India in the first six months, and Turkey, Brazil and Nigeria later on. As the electoral cycle peaks, we believe administrations may feel more able to address barriers to long-term growth and retreat from populist measures.

In these circumstances, the strengths that have helped emerging markets over the past several years, such as solid economic growth potential, strong public and consumer finances, rich natural resources and favourable demographic trends, could gain new traction.

We believe many emerging markets, in addition to China, possess considerable economic growth potential. For example, South-east Asia has been experiencinga notable extension of growth and wealth away from traditional economic hubs, with previously underdeveloped regions starting to catch up to their larger cousins.

Thailand is most notable in this regard, as the reforms instituted by the former prime minister, Thaksin Shinawatra, have resulted in more money going to the countryside and areas outside of Bangkok.

Russia has continued to experience gradual reform as authorities seek foreign investment. Nevertheless, investors have been wary and thus Russian equity valuations at the end of the year were exceptionally low in our view.

Some South African consumer companies have been starting to enjoy solid growth, both domestically and in ventures elsewhere on the continent. Among frontier markets, Kenya is home to a ground-breaking mobile money transfer system that is spreading to other countries and likely will have implications for emerging markets globally.

Microfinance initiatives in Bangladesh are justly famous, in our view, and being duplicated in other emerging markets.

In Egypt, we continue to find companies thriving. We thus have continued interest there even though the headlines may sometimes be alarming.

Central and South America also continue to provide appealing long-term investment opportunities across a range of sectors. We believe that smaller companies in many markets could represent a particularly rich source of investment prospects. As is often the case, adverse short-term news flow in emerging markets typically creates attractive investment opportunities, in our opinion.

As long-term fundamental investors, we do not make short-term predictions for share prices, but we believe longer-term developments that look likely to gain traction this year could drive solid growth in emerging economies for years into the future.

Mark Mobius is the executive chairman of Templeton Emerging Markets Group