Emerging markets started 2016 on a weak note as equities were buffeted by concerns surrounding China’s economy and falling oil prices. However, as the year progressed, positive factors took hold of investor sentiment, leading to emerging-market strength, which we at Templeton Emerging Markets Group believe offers a robust foundation for emerging-market equities as we look toward 2017. Here, Stephen Dover, managing director and chief investment officer of Templeton Emerging Markets Group and Franklin Local Asset Management, and I present our emerging-market equity outlook for the year ahead.

Solid Growth, with Momentum and Valuation Support

Following recent improvements, we expect macroeconomic advances to continue in 2017. This could bode well for top-line growth opportunities and the earnings outlook for emerging-market equities.

We believe that, while gross domestic product (GDP) growth in a number of emerging-market countries has been gaining ground, it is likely that over the next few years we could see further relative advances in sizable economies like Russia and Brazil. The economies of these two countries are still contracting, but they are on an improving trajectory and could significantly influence the growth rate of the whole group if they continue to progress. Meanwhile, China’s growth, which has been a key concern for many observers, has shown signs of stability and remains at a strong level compared to most other large economies. In the third quarter of 2016, the country’s year-on-year growth in GDP came in at a rate of 6.7%, which was in line with the pace reported in the previous two quarters.

Overall, we expect to see GDP growth for emerging markets in 2017 at a solid and accelerating level, markedly above the rate expected from developed markets. Emerging-market countries are still far behind their developed-market counterparts when it comes to overall GDP-per-capita, and so we continue to expect strong growth prospects over the long term.

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Additional economic factors are, we believe, important to our expectations for likely further strength in emerging markets. First, as a group, manufacturing economies are generally back into a position of current account surplus, while there has also been headway in bringing down the deficits of commodity-exporting countries. Second, the debt-to-GDP ratios of emerging-market countries are generally below those of developed markets, providing a more stable and, we believe, sustainable economic foundation. Finally, interest-rate differentials between the two groups are wide, giving emerging-market central banks greater flexibility to maneuver, if required, in the future.

The “hunt for yield” has been a frequently used term in recent years, yet the issue still remains front and center for many market participants. With low and negative yields on many government bonds globally, we continue to expect investors to look toward emerging-market equities, given the income prospects available. For example, the dividend yield was an eye-catching 2.5% as of October 31, 2016, for the MSCI Emerging Markets Index.1 Year-to-date flows toward emerging markets have been positive, partly due to the attractive income expected. However, this follows three years of outflows, and so further moves into emerging markets could be another of 2017’s trends to look out for.