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Equity Outlook 2019: Emerging Markets
The Emerging View
02 January 2019
The recovery in Emerging Markets performance that commenced in 2016 was interrupted in 2018. This was triggered by a series of transitory headwinds, most of which originated from Developed Markets. The result was a swift, and largely indiscriminate, pricing in of risk. This led to sharply divergent performance between perceived higher risk Emerging Markets and the US, in particular. The effect was only exacerbated in smaller companies and Frontier Markets. Meanwhile, Emerging Markets fundamentals themselves remained resilient and positive.
In 2019, several of the key concerns that have weighed on Emerging Markets should dissipate and in some cases may reverse. This should enable Emerging Markets to re-establish themselves as a prime destination for capital that was temporarily lost to the US. Stronger expected economic and earnings growth, lighter investor positioning and depressed valuation multiples, all bode well for Emerging Markets to deliver positive absolute returns and to outperform their developed peers. Risks to this outlook primarily revolve around the pace of deceleration in developed economic growth and the rise of populism. The ability of the Chinese authorities to maintain policy discipline while boosting domestic sentiment also bears monitoring closely. These challenges are likely to sustain elevated levels of market volatility and provide significant opportunity for alpha generation in Emerging Markets.