An Emerging Opportunity?

September 2016

After several tough years, the outlook for Emerging Market (EM) equities is finally improving.  Chinese economic growth and US monetary policy have both played an important role in this uplift.

After several years of slowing economic growth in China we are finally seeing signs of stabilisation.  This observation is supported by business sentiment surveys which also suggest that growth has stabilised.  Fiscal stimulus, credit easing and a reduction of capital outflows have all helped to support growth.  There have also been some positive signs of progress towards China rebalancing its economy to focus more on consumption.  Growth in China and its impact on commodity prices is a key driver of EM equities, so this stabilisation is positive news for them.

US monetary policy also remains an important driver for EM economies.  In the past, higher US interest rates and a stronger US dollar have typically resulted in capital outflows from EM.  However, we believe that the pace of US rate rises will be moderate, lessening the threat of capital outflows.  Also, monetary policy elsewhere in the developed world remains very accommodative – rates are negative in the Eurozone and Japan - the risk of capital outflows reduces further.

EM equities have performed strongly since their February lows and so far this year they have outperformed developed markets.  Despite these recent gains, longer-term EM equity performance still significantly lags that of developed markets and valuations remain relatively attractive.

While emerging markets have common drivers, regional differences are important.  We favour South East Asia for various reasons; strong economic growth, a relatively subdued inflation environment and accommodative monetary policy.  We have a more positive outlook on EM equities overall, with a bias towards South East Asia.