An investor at a brokerage in Beijing. Chinese stocks comprise the biggest share in the $1-billion Templeton EM Fund. Image Credit: AP

Singapore: Emerging-market equities have recovered almost all of last year’s losses, but Franklin Templeton expects gains have more to go as companies’ cash flows improve and China’s economy stabilises.

The increase in free cash flows — or cash left over after a company pays for its operating expenses and capital expenditures — in the developing world will likely reward shareholders with more dividend payouts and stock buy-backs, said Manraj Sekhon, chief investment officer for Franklin Templeton Emerging Markets Equity. His stance to stick with Chinese stocks last year is now proving right with the asset class turning into one of the biggest winners in 2019.

“You are seeing companies behave more efficiently and also behave more rationally on how they treat shareholders and that bodes well for emerging markets,” Singapore-based Sekhon said, citing examples in South Korea, Taiwan and Russia like Samsung Electronics Co. and Lukoil PJSC.

‘It will play out in the next couple of years and you will see it in different areas,” he said.

Emerging markets will also be buoyed by a Chinese economy that is probably on a more “sustainable footing than it’s ever been for a while” with its much better balance between domestic demand and exports, its banks behaving in a “much more rational way” and debt being controlled, Sekhon said.

Templeton’s bullish stance on developing-nation equities is in line with BlackRock Inc., which predicts the asset class will recover their 2018 losses. Among other bulls, GAM Investments estimates the benchmark could double in value by 2023.

In the face of a more dovish Federal Reserve, easing of trade tensions and growth concern in China, the MSCI Emerging Markets Index of stocks have rebounded more than 12 per cent this year, after falling 17 per cent in 2018.

The index’s free cash flow per share could surge about 70 per cent over the next three years from the end of 2018, according to Templeton, citing estimates from FactSet. The forecast signals companies are becoming more disciplined using their capital compared with previous cycles when they over-invested, Sekhon said.

Over the course of 2019, more companies in developing nations should upgrade their earnings as demand picks up by the second half, Sekhon said. That should boost sectors such as consumer goods, technology hardware, semiconductors, and selective financial services in places like India, Indonesia and Brazil, he said.

The MSCI benchmark’s price-to-earnings ratio will probably rise to ‘mid-teens’ by the second half, Sekhon said. The gauge is currently trading at 12.4 times of its 1-year forward earnings estimate, according to Bloomberg data.

Chinese stocks comprise the biggest share in the $1 billion Templeton Emerging Markets Fund at 23 per cent, based on the latest factsheet from the company. The fund had an annualised total return of 13.6 per cent in the past three years through March, compared with 11.1 per cent in the MSCI EM gauge, according to the firm.

“With emerging markets as a whole, the medium and long-term story is better than it’s been for a long time,” Sekhon said.