It’s Not To Late To Enter The Emerging Market Rally

It’s been some spectacular past two years for global emerging markets which have rebounded strongly despite facing headwinds with regards to a stronger US dollar as well as fluctuating oil prices and changing domestic politics.   All across the world emerging markets have registered strong gains thus far in 2017 and we expect to see this continue through 2018 and possibly beyond as economic policies in these markets continue to adapt to changing conditions in the worlds larger markets, such as the U.S and Europe.  As these economies continue to mature we notice that policy makers are increasingly becoming proactive in developing and diversifying their economies and drawing up economic policies designed to weather the very strong likelihood of rising US interest rates over the medium term.

More encouraging has been how broad the rally in emerging markets has been, encompassing economies from Turkey to Chile, Peru to Russia, India to Egypt, China and the broader Asian region.  Ultimately such a wide spread improvement in economic prospects has led to an increasingly stabilized environment, with regards to commodity prices and currency stability and with inflation largely intact we notice growing confidence amongst consumers in emerging markets.  A further very encouraging factor that we believe is playing out is the increasing maturity of many emerging market economies with regards to changing domestic politics with many countries seemingly shrugging off the potential for disruption to economic growth.

The performance in emerging markets has been impressive, take a look at the MSCI emerging markets index (MSCI EMI), covering 26 emerging countries and accounting for 10% of global market capitalization, which is up around 30% thus far this year.  Many of the better performing stock markets within the MSCI EMI are located within the Asia and Latin American regions, with markets in China up by around 45% year to date and India up a comparable 30% plus and equally impressive returns in Brazil of nearly 25% year to date and in Chile (up 35%) as well as a very strong 60% rally in Argentina.

We have noticed a growing preference amongst global investors for increased exposure to emerging markets, with some figures showing that nearly 25% of all new equity investments were specifically focused towards emerging markets.  With such strong support following impressive economic performances it is little wonder that emerging markets have outperformed there developed market counterparts, with Europe registering a year to date gain of around 15% and the U.S a comparable 10%.

We believe this trend is likely to continue and take heart in the recent announcement by US President Donald Trump to nominate Federal Reserve Governor, Jerome Powell, to replace Janet Yellen, as he is widely anticipated to move much slower towards a tightening bias and may well in fact delay any changes for some time to come.  This bodes particularly well for emerging markets which have benefited significantly from the historically low cost of capital afforded by such accommodative Fed policy.

Over the past few years many emerging markets have successfully diversified away from their over reliance on commodities and broadened out their economies towards services and technologies, most notably in the two-power house emerging market economies of China and India.  While India suffered a minor setback to its growth due to the demonetization drive of the Government, it has since recovered pushing reforms in the banking sector and streamlining regulations for foreign investment.  China has also made significant ground towards stimulating domestic consumption and growing its manufacturing industry and recent forecasts from the IMF reflect a more sustainable growth forecast for China of an average of 6.4% per year over the next five years.