Despite potential risks following Donald Trump’s presidential victory, the emerging market growth outlook looks positive for 2017.
Modest economic growth of 4.7% is expected in emerging markets, which is better than in the U.S. and the rest of the developed world, according to a Bank of America Merrill Lynch Global Research report.
India is expected to lead, with GDP rising 7.6%, while China’s bellwether economy expands by 6.6%, Merrill finds. In addition, overall emerging Asia should grow by 6.2%; Eastern Europe, the Middle East and Africa (EEMEA) should rise 1.9%; and Latin America should rebound with growth of 1.5%, after a drop in 2016.
According to Merrill, U.S. rates will likely cast a shadow over emerging markets debt, with returns of about 2.6% for external debt and 0.7% for local debt.
While emerging markets usually grow faster that developed markets, 2016 was the first year that emerging markets’ growth was accelerating faster than developed markets since 2011.
Ed Kerschner, chief investment strategist at Columbia Threadneedle Investments, thinks this could continue through 2020.
“Historically whenever EM growth accelerates faster than developed market growth, emerging markets have outperformed developed markets,” Kerschner told ThinkAdvisor. “So far we’re seeing EM outperforming developed markets this year. And we would expect that to continue into next year because of that accelerating growth.”
David Kelly, managing director and chief global strategist at J.P. Morgan Asset Management, also finds that consensus expectations in 2016 have been consistently pointing to an improvement in the emerging market growth alpha over the next 12 months, for the first time in almost six years.
“This is a trend we expect to continue picking up steam in 2017,” Kelly writes in his 2017 investment outlook. “This return of the EM growth alpha has come from a fall in expectations of [developed market] growth rates, as well as most recently from an expected pickup in EM growth itself.”
According to Kerschner, earnings growth and “reasonably attractive” valuations are contributing to this positive outlook for emerging markets.
“You’ve got expectations that emerging market earnings will – in 2017 – outperform the U.S., outperform Europe, outperform Japan,” Kerschner said.
According to FactSet consensus estimates, emerging market earnings are expected to grow by 15% in 2017. In addition, LPL Research’s 2017 Outlook cites valuations overseas, and “especially” in emerging markets, as “particularly attractive.”
Although there may be opportunities in emerging markets, geopolitical risks do suggest some caution.