Emerging markets pick up steam

Emerging markets suffered a nasty fall at the beginning of 2016. But this year, the MSCI Emerging Markets index has gained almost a tenth since 1 January, while its developed-market counterpart is up 5%. That’s the index’s best start relative to developed-market stocks since 2013. Global investors have become more confident, pouring $2.7bn into emerging-market funds last week, the highest weekly total for half a year.

Chalk it up to an improving global growth outlook, with the turn in the commodities cycle and an incipient recovery in world trade the most notable features. “In Asia’s export dynamos, trade is picking up steam,” as The Economist points out. South Korea, once of the world’s most open economies, is considered a bellwether in this regard; its exports have climbed for three months on the trot. China’s exports rose year-on-year for the first time in ten months in January.

Global growth could reach 3.4% this year, up from 3.1% in 2016, says the International Monetary Fund. The US economy has accelerated, Europe looks solid for now, China is holding up and recessions in Brazil and Russia, two big emerging economies, are easing. Standard Chartered is pencilling in earnings growth of 13% for Asia ex-Japan this year, an improvement on 3% in 2016.

All this sounds encouraging. But investors appear to be ignoring the danger of “a significant increase in protectionism, up to and including ‘trade wars’ [which] is material and rising”, according to Citigroup’s Willem Buiter. If Trump does start a trade conflict, it will damage export-orientated emerging markets most – and given that we are just breaking free from a long trade slump, added The Economist, “the irony would be all the more cruel”.

Global investors to get an income boost

Reinvested dividends account for the lion’s share of long-term equity returns, so it’s worth keeping an eye on payout trends. Last year was a disappointment for global income investors, according to fund management group Henderson. Its Global Dividend index, which tracks the world’s biggest 1,200 companies and is measured in dollars, advanced by a measly 0.1% to $1.154trn last year. Lower US earnings and a strong dollar, which reduces the value of income paid out in other currencies, were the main culprits. The improved global economic outlook suggests this year should be better, however. Meanwhile, the latest Dividend Monitor from Capita Asset Services expects the sterling slide to help bolster payouts to British investors in 2017.   

Merryn

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