Perhaps unsurprisingly for an investment universe with high levels of hard currency debt, emerging markets have historically shown a high sensitivity to the US dollar. A moderate normalization of US monetary policy in 2017 coupled with continued US dollar strength would therefore pose a serious risk to emerging markets asset prices via increased debt servicing costs and lower growth prospects. However, we believe that the peak of stress to US dollar strength lies behind us.
Until mid-2016, global developed markets experienced low economic growth and persistently low inflation. The ongoing upswing of global growth and moderate reflation are likely to benefit emerging markets which suffered during the years of weak growth. The current brighter growth outlook suggests a preference for investment themes which profit from an economic expansion.
From our perspective, several emerging markets countries are poised to outperform based on their GDP growth. However, country-level GDP growth alone does not always translate into improved investment returns. There are a number of additional factors to consider—for example, the strength of local corporate governance and the impact this may have on performance.