2016 was a solid year for emerging market equities. Despite a cyclical low at the end of January and significant pullbacks in the fourth quarter as a reaction to the election of Donald Trump, the MSCI Emerging Markets ended the year with a gain of around 11.1%.
The coming year also promises to be a positive one. EM leading indicators are pointing to a pick-up in economic growth, falling inflation rates are enabling EM central banks to cut interest rates, and the more stable oil price is helping to ease budget deficits. In addition, the coming reflation policy in the US brings the prospect of increased demand for EM exports. All of this will likely be reflected in higher corporate earnings and support share prices.
However, US policy remains the major risk factor too. It is still unclear which emerging markets will be affected by US trade sanctions, and to what extent. In addition, higher US interest rates are leading to outflows of money from the emerging markets. Still, those emerging markets that have sustained reform momentum, a large domestic market or solid trade balances are likely to be able to cope with any (Twitter) storm coming from Trump’s direction. Specifically, these are countries such as India and the eastern European nations. Cautious optimism therefore just about holds sway for EM equities in 2017.
Author: Michel Roth, Financial Economist, LGT Capital Partners