Can Emerging Markets Stand on Their Own Feet in 2017?

The nascent recovery in emerging markets (EMs) has been thrown into question by Trump’s election. While the concerns warrant attention, we still see compelling reasons to invest in developing economies.

After 10 strong months, investor sentiment toward EMs has soured. Since the US election, rising US interest rates and a strengthening dollar have threatened to hurt EM countries and companies. Trump’s promises of protectionist policies have alarmed countries from Mexico to China. And from Brexit to the recent Italian referendum, there are growing signs around the world that populist trends are threatening to reverse globalization, which has benefited the developing world for decades.

But let’s put some perspective on the risks. The shifting geopolitical order may dilute the power of US trends over the developing world. Favorable domestic economic trends in EM countries could offset potential damage from US policies. And opportunities can still be found in EM companies that are relatively immune to the uncertainty emanating from the US.

NEW GEOPOLITICAL ORDER?

The geopolitical order is shifting towards emerging powers. China’s regional influence in Asia has risen. Russia’s resurgent influence in Ukraine, Hungary, Bulgaria and several former Soviet republics in Central Asia has defied sanctions from the West.

The International Monetary Fund (IMF) and the World Bank are no longer the sole source of emergency financing for emerging countries. Global institutions are less effective in resolving regional conflicts. In short, emerging countries are becoming less reliant on external sources to generate growth and provide emergency support.

ASSERTING ECONOMIC INDEPENDENCE

Developing countries are also asserting their economic independence. Improving economic growth in many developing economies is driven by domestic trends—not by the US. For example, Russia and Brazil are shifting from recession toward recovery. Accelerating growth in more EM economies can help offset the impact of China’s deceleration, in our view.

Inflation has largely been tamed across the developing world in countries such as Brazil. Poor performers such as Venezuela are the exception. And real interest rates are low enough to be a stimulating factor across many developing countries.

External balances have adjusted significantly. As a result, EM economies are generally less reliant on foreign capital—and therefore less vulnerable to rising interest rates in developed markets (DMs).