However, emerging markets could likely withstand gradual tightening of Fed monetary policy (whereby the dollar doesn’t strengthen much further), with relatively low valuations, decent domestic growth and higher commodity prices providing support. Meanwhile, at a company level, although improved capital discipline and productivity are necessary to improve earnings growth and win over unconvinced investors, weak corporate profitability is, at least, easing.
Divergence within the asset class also looks highly likely, with geographic and sectoral winners and losers dictated by the permutations of possible US monetary, trade and fiscal policy, alongside local factors.
A particularly rosy scenario would see a widespread beneficial impact for emerging markets (especially exporters) if US spending results in a boost to global as well as US growth, US interest rates increase only marginally, and protectionist policies fail to materialise.
Perhaps most encouragingly of all, there is a healthy degree of scepticism and investors are generally light in the asset class, which often bodes well for future returns. Without rebalancing, a 10 per cent weighting in emerging markets within a typical global equity portfolio five years ago would be closer to around 5 per cent now; so there is scope for positive flows from investors moving into growth assets and out of defensives.
If there is an environment of higher growth and inflation, and the Trump effect on global trade turns out to be neutral or positive, then investors are likely to instinctively turn to the asset class.
Rob Morgan is pensions and investments analyst at Charles Stanley Direct