Energy Rise, Markets Slide

Weekly Market Snapshot

• Divergent Trends in the Markets Amidst Broader Declines

Behind the Headlines: What happened?

The MSCI emerging market index had a rough week, taking a dive by -1.16%. This is a substantial drop when compared to the 1.15% it had in the prior week, marking a -201% change. However, amidst this overall downturn, there were pockets of resilience. The energy sector managed to eke out a gain of 1.16%, while the real estate sector also returned 0.77%. In parallel, the frontier markets experienced a sudden nosedive, with returns dropping to -0.38% during the week ending September 8th, 2023, down from the previous week’s 1.45%, representing a significant -126% decline as these markets struggled to recover from a bearish phase. Major sectors in the frontier markets also saw a decline, with the energy sector returning 2.30% to returns, down from 4.67%, and the materials sector declining to 1.72% from 2.17%.

Source: Factset

The sharp decline in returns across these markets can be attributed to the economic slowdown that had a cascading effect on market performance. Furthermore, major indices experienced declines due to mounting profit-taking pressure in the stock markets, as investors moved to have a chunk in profit that were recorded during the markets recovery recorded in the past weeks.

The Inside Scoop:

When we delve into the contributions of individual stocks to the decline in returns within the emerging markets, Taiwan Semiconductor topped the chart with a contribution of -0.14%. This was followed by Samsung Electronics Co., Ltd., PDD Holdings Inc. Sponsored ADR Class A, SK Hynix Inc, and Tencent Holdings Ltd, which played their part in the decline with contributions of -0.08%, -0.07%, -0.05%, and -0.04%, respectively.

Source: Factset

Taiwan Semiconductor Manufacturing Ltd. plunged as a key supplier of Apple due to pressure on chip stocks and semiconductors stemming from China’s actions against iPhones and the launch of Huawei’s 5G Kirin 9000s chip-powered smartphone. Samsung Electronics Co. and chipmaker SK Hynix Inc. also declined in response to the same news.

Within the context of Frontier markets, Kazakhstan’s Kaspi.kz JSC contributed -0.24% to the downturn. Following closely were Vingroup JSC, Marel HF, MAS P.L.C., and Nova, which contributed -0.13%, -0.13%, -0.08%, and -0.05%, respectively, to the decline in returns. MAS P.L.C recorded negative returns as the company is coping with the grief of market changes, debt financing, cost and availability. The Maltese Company also halted the payment of H1 dividend to its shareholders which has affected Investors’ confidence in the company.

Source: Factset

A silver lining was found as Vietnam led the frontier markets in terms of return contribution with a return of 0.36%. This is evident as major Vietnamese companies such as Hoa Phat Group JSC and Vietnam Diary Products joined the top gainers with 0.12% and 0.06% returns, respectively. This, however, signalled an increase in demand and consumption for Vietnamese goods because of suppressed external woes from its trade partners, such as the USA and Europe.

Connecting the Dots:

In emerging markets, the overall valuation is currently mixed, and the markets are touted to be undervalued given that, on average, emerging markets are trading at relatively lower prices compared to their earnings potential and expected future growth. This sentiment is substantiated by a PEG ratio of 0.72x which is below the median (since the beginning of the year) of 0.84x. Meanwhile, looking at dividend yield, emerging markets currently stand at 2.99%. This is the lowest recorded in the past week since the year began.

For the frontier markets, recovery optimism took a hit as markets reversed their recovery trend after weeks of bearishness. The average market capitalization dropped from $4.4 trillion to $4.3 trillion for the week ending September 8th, 2023, indicating a decline in share prices and a dip in market sentiment compared to the previous week. Importantly, this figure is notably lower than the year’s initial average of $4.96 trillion, signalling a downturn in investor confidence. The return on equity (ROE) also remained low, rising marginally by 0.01 to 19.95 from 19.94 the previous week. The prior week’s ROE was the lowest this year, as it has been on a downward trend, currently lower than the year average of 20.83 and this year’s peak of 21.76 in February.

Earnings in the global macroeconomic environment, including developed and emerging economies, have been down this year as a result of the tough macroeconomic conditions of elevated inflation and tight monetary policy, which have hampered business operations. However, the projected loosening of monetary policy in the coming quarter due to lower inflation is expected to bolster firms’ revenues.

The Bottom Line:

The markets are poised for a potential rebound as various sectors aim to recover from the declines witnessed last week. An example is Vietnam, which is actively working to bolster its recent gains by attracting investments from Japan. These investments are targeted at areas such as electronic component manufacturing and civil industry, reflecting the country’s commitment to economic growth and resilience in the face of market challenges. However, the emerging markets may witness a rocky recovery amidst the expectation of consumer inflation as investors are shifting to U.S. equities after a drop in the emerging markets as a continuous slump clouds growth optimism in China.

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