After a weak start to 2016 due to concerns over China and falling oil prices, recent macroeconomic advances and improved investor sentiment bodes well for top-line growth opportunities and the earnings outlook for emerging-market equities throughout the rest of 2017.
Over the next few years we expect to see continued expansion of gross domestic product (GDP) growth in a majority of emerging-market (EM) countries, most particularly in the larger EM economies, such as Brazil and Russia. Meanwhile the outlook for China, which has concerned many investors, has begun to show signs of stability and GDP growth remains at a strong comparative level. Overall, expectations remain high for a solid and expansionary growth in GDP across most EM economies, at a rate which remains significantly higher than developed markets.
Emerging market countries are still far behind more developed economies when it comes to overall GDP per capita, and this is expected to continue to underpin strong growth prospects over the longer term. Behind robust expectations for emerging markets are key economic factors. Of particular note is strength in manufacturing economies which have largely moved back towards current account surpluses and slowly but surely commodity-exporting countries have built upon gains to bring down their deficits.
Additionally, the debt to GDP ratios of EM economies are generally below those of developed markets and provide a more stable and sustainable economic foundation and still wide interest rate differentials between emerging and developed economies, provides EM central banks greater flexibility to manoeuvre in the future.
In terms of valuations, the MSCI Emerging Markets index has traded at a significant discount to the MSCI World Index, on a price to earnings basis, while growth trends continue to improve significantly in line with strengthening economies and stabilising corporate fundamentals.
Of interest are consumer-related companies which provide an attractive way to gain exposure to expanding EM economies, fuelled by growth in consumer spending as rising regional wealth fuels a burgeoning consumer class.
Another sector poised to benefit significantly is information technology (I.T) which continues to record strong adoption rates and is becoming increasingly integral and competitive in emerging markets.
Asian small capitalisation stocks also provide strong potential supported by solid growth prospects with the added benefit of having a stronger domestic focus versus their larger peers, protecting them to a large extent from challenging macroeconomic factors at a global level.
Whilst US Federal Reserve monetary policy still presents a significant concern for many EM investors, it is increasingly likely that any rate increases will be gradual, although of course investors should still be wary of the potential for a turn in sentiment and an increase in volatility should US interest rates move at a larger or faster rate than currently expected.