Since 2016, a weaker US dollar and higher global commodity prices have benefited investors in emerging markets (EM), with the MSCI Emerging Market equity index rising by 27% from the start of 2017 through the end of August and the JP Morgan Emerging Markets Bond Index Global up by 8.2% during the same period.
Monetary policy normalization in the US, ongoing pro-growth policies in China and a global economic recovery have produced a rising tide that has helped lift emerging markets; the IMF forecasts that 94% of all counties will show positive GDP growth this year. However, those external circumstances can and will change over time. For long-term investors, understanding the case for EM requires taking a look at the seaworthiness of the emerging economies themselves.
Headlines certainly raise some concerns about EM countries, such as Venezuela whose leadership seems more interested in consolidating power than in preventing economic collapse. Elsewhere, South Korea’s economic success story faces the ongoing menace posed by Kim Jong Un in North Korea. ISIS and other threats loom in the Middle East, corruption plagues Brazil and Russia plagues Ukraine. Despite these geopolitical risks, though, we believe that the fundamental case for emerging-market investment remains solid.