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2017 Emerging Markets Outlook

The Emerging View

21 December 2016

We present Ashmore’s outlook for fixed income and equities in Emerging Markets (EM) in 2017. EM performed well in 2016 despite the expectations of draconian trade wars, three Fed hikes and very strong US earnings growth in 2017. None of these is likely to materialise to the expected extent. Given this excellent entry point the outlook for EM fixed income in 2017 is one of the brightest in several years. Beyond the good entry point, there are good prospects for exceptional performance next year due to stronger growth, excellent valuations, currency appreciation and benign technicals. We particularly like the outlook for much maligned EM local currency bonds, although high beta credits in sovereign space should also do well. Corporates should deliver decent returns on the back of falling default rates. The major innovations in the global backdrop compared to recent years are the return to deficit spending in rich countries and modestly rising inflation in the US. These two developments will prove positive for EM by restoring the positive correlation, which has traditionally existed between US stocks and EM fixed income. As such, the pullback in EM markets versus US markets in Q4 2016 clearly presents a buying opportunity. The biggest risks to EM emanate from developed economies, where political, economic and financial constraints slowly become more pressing. However, EM bond markets have already priced in the Fed’s likely path for rate hikes and will prove resilient to developed market events. EM-specific risks are declining, idiosyncratic and best mitigated with active management. We are also cautiously optimistic about EM equities on the back of better macroeconomic drivers and very compelling valuations. Our slight hesitation with respect to equities reflects the potential for negative beta effects emanating from political risks in developed economies.

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