Emerging Markets  

The outlook for emerging markets

This article is part of
Guide to investing in emerging markets

The outlook for emerging markets

Emerging markets have performed well in 2017 so far, but investors are always reminded not to look at past performance as an indicator of how an asset class might perform in the future.

However, in this instance, it may be the reasons emerging markets have been growing in 2017 will also give investors a clue as to the outlook for these markets over the next 12 months.

Daryl Liew, head of portfolio management at REYL Singapore points out: “Emerging markets have enjoyed a stellar run so far in 2017, amid a favourable environment of a recovery in global economic growth, low inflationary pressures and a weak US dollar. 

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“These conditions will likely continue to hold for the rest of the year which suggests that emerging markets could continue to head higher.”

As discussed earlier in the guide, grouping together emerging market economies into the BRICs or emerging Europe can make it harder for advisers and investors to differentiate between the opportunities in the different countries.

So for Alejandro Arevalo, fund manager, emerging market debt at Jupiter Asset Management, the outlook is largely mixed. 

“While we cannot assume all economies are moving in the same direction, there are enough signs to indicate the asset class is more resilient that it was even three years ago,” he suggests. 

“On the one hand, we have several countries with improving political and macro backdrops that are helping their growth trajectory and investor sentiment towards them, such as Argentina, Indonesia and India. 

“On the other hand, we have several others that have upcoming political and/or economic issues.

"The latter includes Venezuela, likely to default or need to restructure its debt fairly imminently; South Korea and Japan, which are suffering from tensions with North Korea; China, which is trying its utmost to prevent its credit bubble from bursting; and Brazil, which is still reeling from the corruption issues that are stalling its recovery.”

Political risk

Political concerns are often at the forefront of investors’ minds when investing in emerging markets.

While there are many portfolio managers who believe geopolitics can and should be overlooked, it is worth understanding what potential political headwinds face the emerging markets economies, particularly when they go hand-in-hand with the economic outlook.

The rising tensions in North Korea have been hard to ignore recently as the country continues to test missiles and nuclear weapons, in spite of global condemnation, including from some of the BRIC countries, China and Russia.

Mr Liew suggests geopolitics is arguably the biggest risk to this asset class at the moment, pointing to potential military conflict in the North Korean peninsula.

“In this regard, North Asian markets are probably most at risk due to their relatively high exposure to global trade and their geographical proximity to North Korea.