With political and economic uncertainty moving from region to region, several managers believe that 2017 could be the year that emerging markets emerge as leading performers.
In fact, several factors are aligning to bolster optimism in emerging markets, according to a recent analysis by New York-based Lazard Asset Management.
“After several years of emerging markets underperformance, we believe investors are looking for evidence of solid global growth, signs of an earnings recovery, possibly the result of reaching a floor in commodity prices, and a gradual tightening of monetary policy by the Fed,” said Lazard. “If these conditions do occur, we believe the potential upside in emerging markets is significant.”
Lazard isn’t alone: A survey released in February by Boston-based Columbia Threadneedle Investments found that asset managers and advisors are feeling more positive about emerging market equities this year than they were a year ago.
Jason Bloom, global market strategist at Invesco PowerShares, is among the optimists.
“I think there’s a higher degree of visibility and positivity in the emerging markets outlook than some are expecting,” Bloom says. “We’re seeing a resurgence of growth in many markets. This is a positive trend, but advisors should keep their eyes open for political risks.”
Despite his firm’s positivity, this year’s global political and economic climate raises some serious questions for emerging market investors, says James Donald, head of emerging markets at Lazard.
“We’re broadly positive, but we’re aware of the risks in the markets and we’re trying to some extent to balance those,” Donald says.
Donald identifies Donald Trump’s policies around trade and immigration as potential negative impacts to emerging markets that investors aren’t taking seriously enough. “The markets are moving higher, and I’m surprised at how positively equity markets in particular have taken Trump’s policy proposals and that they seem to indicate that they don’t expect any negative impact,” he says.
While many of Trump’s trade policies will impact international markets across the board, a proposed border adjustment tax may have a larger effect on emerging markets. Currencies in more developed markets could depreciate to offset the border tax, but currency depreciation in emerging markets is unlikely to sufficiently offset the tax rate.