Cautious optimism in sector despite Trump wildcard

Jade Fu, investment manager at Heartwood Investment Management, says: “Since the start of this year, emerging market equities have made a moderate recovery, perhaps reflecting investor concerns around political uncertainty at a time when global economic fundamentals seem to be improving, with China’s economy stabilising and steady commodity prices. For now, investors are in wait-and-see mode.”

Nick Leung, research analyst at WisdomTree Europe, points out that in 2016 the revival in commodity prices was the most important factor underpinning improving sentiment towards EM. 

He says: “This has provided fundamental support for improving emerging market corporate earnings, evident by upwards earnings-per-share revisions of 12 per cent, year on year. Fuelled by Donald Trump’s pro-growth economic agenda and infrastructure spending in China, commodity demand is set to strengthen, boosting growth prospects for EM corporate earnings for the year ahead.”

Emily Whiting, client portfolio manager, emerging markets and Asia Pacific equities at JPMorgan Asset Management, says she is “cautiously optimistic”, as the recovery currently under way in a number of emerging economies and the stability foreseen in China this year supports expectations of a more broad-based turnaround in EM earnings. 

But she warns: “The resumption of US dollar strength threatens to undermine the recovery in EM currencies and earnings – at least temporarily.”

Mr Trump’s policies remain a wildcard for the sector but there is some cause for optimism. Jon Wingent, head of portfolio specialists at Lloyds Private Banking, says: “The latest purchasing managers index surveys suggest that the economies of Russia and Brazil might have turned the corner and could even be out of recession by early this year. 

The future becomes more uncertain after the election of a US president who has spoken about imposing import duties on China and suggested that some of its actions could be construed as currency manipulation. 

“On balance though, with global interest rates looking likely to stay low for the time being, the outlook for emerging markets, especially in Asia, remains positive.”

John Malloy, manager of the RWC Global Emerging Markets fund, highlights that, overall, emerging markets outperformed developed markets last year – and the trend is continuing into 2017. 

“Emerging markets are higher than they were pre-Trump victory,” he notes. “That said, they are still more than 30 per cent below the peak in 2007. Meanwhile, indices like the S&P are more than 40 per cent above that level. After years of underperformance and outflows, the tide [may be] turning for emerging and frontier markets. 

“The MSCI Emerging Market index trades at 12 times forward earnings and the MSCI Frontier Markets index is more than 10 per cent cheaper compared to emerging markets.”

Mark Vincent, manager of Standard Life Investments’ Global Emerging Market Equity Income fund, agrees 2016 marked a turnaround for EM, although he notes: “Mr Trump’s election temporarily reversed that trend with the benchmark declining by about 6 per cent.” 

In contrast to Mr Wingent, he sees rising rates as a positive for EM, given its role as a play on global growth. But Mr Vincent adds: “Protectionism is more of an unknown and does present a risk. However, if economic sanity prevails, it seems reasonable that a lot of this is rhetoric.”

Nyree Stewart is features editor at Investment Adviser