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March 2017

Staying the Course in Emerging Markets

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We believe Donald J. Trump’s victory in the US election has fueled three main concerns for Emerging Markets (EM): potential protectionist trade policies, rising rates and a strengthening US dollar. The surprising result created uncertainty for EM, which is reflected in equity market performance and flows since the election: the MSCI EM Index is down 5%, underperforming developed market (DM) equities by almost 7% and suffering the worst week of underperformance since the financial crisis1. EM equity flows have also sharply reversed; outflows hit $7bn in the week following the election – equating to one third of year-to-date (YTD) inflows2.

EQUITY MARKET PERFORMANCE SINCE THE US ELECTION*

staying-the-course-eme-01

We believe the initial market reaction is underappreciating the diversity of the EM opportunity set and the wide-ranging impacts of trade policy, rising US interest rates and a strengthening dollar on each of the 23 economies in EM. We also think investors may be overestimating the potential for campaign promises to become
actual policy.

In our view, the long-term case for owning EM equities – portfolio diversification and alpha potential – remains intact. In this piece, we discuss some of the key reasons we believe long-term investors, especially those trying to build up to a strategic weight in EM, should stay the course.


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