2017 was a good year for Emerging Markets, which continued their recent strong run, keeping them on track to outperform Developed Markets in back-to-back years for the first time since 2009/10. Compared to 2016, which offered only marginal outperformance thanks to the election result in the US in November causing a sharp market correction, the performance throughout 2017 was relatively much stronger.
The first period of synchronised global growth to be seen since the 2008 financial crisis has driven global markets in general, which has provided a favourable backdrop for Emerging Markets. The Chinese economy saw particular stability in 2017, with corporate wages and profits pushed higher by continuing economic rebalancing and ongoing supply-side reform. Long-term bond yields were contained, thanks to low inflation across the globe in tandem with the robust growth backdrop. With growth strong and inflation low, Emerging Markets enjoyed a ‘goldilocks’ economic environment – neither too hot nor too cold.
Emerging Market returns delivered a strong performance of the largest stocks in the benchmark towards the end of 2017. This was particularly true of those in the technology sector, which accounts for half of the index’s total return alone. Stocks for Alibaba and Tencent, two of the biggest players, nearly doubled throughout the year. As is often true in the early years of a bull market, performance has been commanded by the top-20 stocks by market capitalisation.
Looking to the months ahead, as global growth is expected to gather further momentum in 2018, Emerging Market outperformance is forecast to continue. Internal reform and rebalancing is predicted to continue in China, improving growth quality and embracing financial reform in order to avoid serious slowdown. Emerging Markets have suffered in a global economic downcycle for the past seven years; but as business investment and consumption improve they are expected to experience a renewed credit cycle, especially when taking into account the extremely low levels of private sector credit similar to those seen after the Asian Financial Crisis.
The period of underperformance in Emerging Markets from 2010 to 2016 was unusual which is why with the significant discount of Emerging Market assets to Developed Market assets, coupled with the economic and earnings growth premium available, the outperformance of Emerging Markets is widely expected to continue.