Investing in emerging markets. Five good reasons.

Emerging market (EM) assets exhibit attractive valuations that are out of sync with fundamentals and a lighter market positioning, providing an attractive investment case. Five reasons for emerging market equities.

Emerging markets remain resilient despite poorer performance

Emerging markets have been on a bumpy road this year. This is despite stable economic conditions and a substantially lower vulnerability to external factors. Yet it is important to keep in mind that these markets are fundamentally stronger now than they were in previous periods of stress. Economic growth has remained much more solid than the performance of EM assets this year might suggest.

Investors have struggled to cope with multiple factors that emerged this year, including a more demanding external environment given US dollar strength and higher US interest rates. Additionally, there are increasing trade tensions with China, the world’s growth engine, which is particularly in focus and potentially most affected. Moreover, we cannot forget a number of individual countries that have struggled amid a combination of external vulnerabilities and domestic issues, as for example Turkey and Argentina.

Emerging markets are on the road to recovery

These factors have resulted in significant selling pressure on EM assets, also triggering simultaneous and sharp declines in exchange rates. Looking at EM assets now, we see the reflection of a crisis-like scenario that is hard to subscribe to. There are five reasons why EM assets are likely to recover:

1. Emerging markets continue to show economic growth

Solid economic growth is continuing, which is why global EMs are expected to achieve real GDP growth of 4.5 percent in 2019. They are driven particularly by China, but also by Latin America, a region that is improving after a challenging 2018 so far.

2. Emerging market equities are increasing in value

Valutations of EM assets are expected to be out of sync with long-term underlying fundamentals. This argument plays an important role in stabilizing investor sentiment after periods of stress.

3. There is more security when investing in emerging markets

External imbalances, which have an effect on emerging markets, have significantly diminished. Residual pockets of external vulnerabilities remain in select countries, but the bulk of EM countries have strong external and domestic balances.

4. Political influences on emerging markets are decreasing

The political calendar in 2019 is meaningfully lighter. The year 2018 was unusually busy in terms of presidential and parliamentary elections. This gave rise to political uncertainty in certain high-profile EM countries such as Mexico, Colombia, Turkey, Russia, Malaysia and Brazil.

5. US tightening cycle supports emerging markets

EMs tend to perform better in the latter stages of the US Federal Reserve’s tightening cycles. Going forward, our economists expect the Fed to hike rates three more times by 25 basis points each, with one hike forecast in December and two in the two following quarters.