I was on the phone with my mother discussing the holidays and the conversation turned into a discussion of 2016. Three minutes into our conversation, I started to realize just how challenging 2016 was … politics, conflict, news overload, Gene Wilder, AKA Willy Wonka, died (I never found a golden ticket). Emerging markets were — once again — no exception. We had an incredibly poor start to the year given lingering concerns over China and its circuit breakers. Additionally, we weathered Brexit, a presidential impeachment in Brazil, a failed coup in Turkey, the passage of Thailand’s 20th constitution in 84 years, Egypt’s devaluation and India’s demonetization.
As the new year begins, we look back on that eventful and volatile 2016. While some of the return accumulated up to the U.S. election was erased, emerging markets (as measured by the MSCI Emerging Markets Index) ended the year with solid, positive returns more than 11 percent.1 Following the U.S. election, the hope of fiscal and regulatory easing helped raise growth and inflation expectations, which pushed U.S. yields and the dollar higher, weighing on emerging markets.
Policy Potential and Growth Expectations
The initial post-election environment will be difficult, particularly as Donald Trump clarifies his approach to U.S. trade with the rest of the world. However, once U.S. growth firms and rates stabilize, we believe emerging markets will be just fine. Upbeat global activity and firmer commodity markets will benefit emerging markets. Will markets continue to be driven by reflation expectations? In our opinion, as growth expectations begin to materialize, the recent outperformance of early-cycle styles will make way for more sustainable growth strategies.
Patricia Ribeiro, Senior Portfolio Manager for our emerging market strategies, recently discussed her views on the emerging market landscape. She believes it’s imperative to separate country noise from company fundamentals. While the macro environment is important, ours is a bottom-up approach, which focuses on identifying companies with sustainable earnings acceleration. This method frames our philosophy and helped Patricia earn recognition as one of America’s top 20 female portfolio managers by Citywire.
In conclusion, we remain constructive on emerging markets as an asset class and our approach in 2017. There was significant fundamental improvement in the asset class last year; markets are simply reacting to uncertainty and implications of the Trump presidency. There will be bouts of volatility, but the fundamental story supporting earnings per share growth in emerging markets remains intact.
1 MSCI Emerging Markets Index return from December 31, 2015, to December 30, 2016.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
The opinions expressed are those of Nathan Chaudoin and are no guarantee of the future performance of any American Century Investments fund. This information is for educational purposes only and is not intended as investment advice.