Better growth in emerging markets

Kevin Anderson Head of investments, Asia Pacific, State Street Global Advisors

We believe emerging markets as a whole are still likely to grow faster than developed markets in coming years. Out of every dollar of additional gross domestic product created in the world economy between now and 2020, about 58¢ will originate in emerging markets. Against that background, we view emerging markets equities as too important to ignore as a long-term source of portfolio return.

Our 2017 forecast for emerging market equities is a return of 6% on a stronger growth outlook as both Russia and Brazil emerge from recession and as the negative impact of falling commodity prices has abated. We have also seen a significant uptick in the earnings generated by emerging market companies while at a global level we don’t see equity valuations as being significantly over-extended. This suggests 2017 may be a good time to add to a long-term exposure in emerging market equities.

Of course, there are always risks and the volatility of emerging market equities is expected to be higher than in developed markets. We can’t over-emphasise the importance of an economic reform agenda and political stability. Many favourable trends seen in the past two decades, such as rapid labour force growth and globalisation, are at the very least stalling.

Finally, future US trade policy outcomes mean heightened uncertainty and potentially intensifying headwinds for emerging markets, which is why the quality of the domestic policy response becomes even more critical.

One thing is certain for the emerging market outlook for the year: performance will continue to vary greatly from country to country. To enhance the potential outcomes, investors should take a differentiated approach.