Why investors should stick with emerging markets 

Emerging markets started to wobble in the immediate aftermath of Donald Trump’s election in November, largely prompted by concerns around the US president’s clear push towards protectionism. 

Dan Kemp, chief investment officer for Morningstar Investment Management, said Mr Trump’s dislike for the trade deficit between the US and China could “all too easily resonate”, encouraging investors to shift their positions to try to benefit from the swift action taken by the new president.

Mr Kemp pointed out that the reallocation of American manufacturing jobs to China caused consumer prices to fall, which has in turn pushed up living standards in the US. 

“The huge trade imbalance created by globalisation has thus conferred many benefits on the American people, yet some expect this multi-decade relationship to unwind within a matter of weeks or months.”

The investment chief warned of the dangers of making this assumption, pointing to the lack of certainty around how Mr Trump’s proposed policies could play out. 

He also said investors seldom predict the outcomes of geopolitical events, or draw the correct conclusion for asset price movements. 

“This is not usually because of a lack of knowledge, but because they are attempting to delineate other people’s emotional reaction to an event that has not yet happened. “

He claimed the “only rational answer” is to focus on the long-term, pointing to Morningstar analysis which indicates that emerging markets have a positive yield and pay-out growth rate going forward. 

Yet the supportive environment could begin to show cracks Alex Wolf

While Mr Kemp admitted he is not excited by emerging markets, he said the sector looks attractive relative to other equity asset classes, saying it was still one of the favoured destinations for long-term investment.

Despite the vulnerability inflicted on the sector due to the impounding sense of protectionism from developed markets, emerging markets have had a stable start to 2017.

Alex Wolf, senior emerging economist at Standard Life Investments, said the conditions which began the sector’s recovery last year are largely still intact.

This comes despite investment veterans warning that Mr Trump’s policies could wipe out the healthy returns which emerging markets enjoyed last year.

Yet across both commodity and manufacturing exporters, the upswing in activity has continued. 

Emerging market fund group Ashmore posted a huge 94 per cent rise in pre-tax profits last year, despite seeing outflows of $700m (£558m).

Mr Wolf pointed out that manufacturing levels have improved in both India and across the ASEAN region last month, while Brazil’s trade and production data has been stronger than expected.

Yet he said the biggest piece of the emerging market equation, China, does not post reliable data until after the Chinese New Year.

“Although there is little to derail the EM recovery in the near term, the outlook remains highly uncertain,” he said, adding the factors that drove the sector's economic and market performance are now at risk of receding. 

Flows into emerging markets had previously been boosted by stronger-than-expected Chinese demand, stronger external demand from the US and Europe, a stable dollar and interest rate environment, and a rebound in the global tech cycle. 

“With industrial growth set to slow in China and the Fed continuing to hike rates, the supportive environment could begin to show cracks.”

At the moment, conditions in emerging markets look positive, but the Standard Life economist said the biggest question is sustainability. 

“Potentially damaging US policies and an unclear Chinese industrial outlook leave emerging market growth hanging in the balance.”