Emerging markets: trading on borrowed time?

Following a nasty fall in late 2016, emerging markets are back in fashion. The MSCI Emerging Markets index has reached its highest level in 18 months as hopes spread of a durable rise in regional GDP growth. According to the Institute of International Finance, developing countries grew by an average of 6.4% year-on-year in January, a six-year high. The Emerging Market PMI index tracking manufacturing activity is at a two-year high.

Firmer growth in the West has gradually bolstered East-West trade, says Jonathan Wheatley in the Financial Times. Vietnam’s clothing industry, for instance, has seen sales climb from $7bn in 2009 to $26bn last year. Carmakers in Brazil and electronics companies in South Korea are selling more overseas. So this isn’t just a case of a comeback in commodities helping to boost emerging-market exports, although the rebound in China has had this effect and has bolstered Brazil and Russia, hastening these large economies’ emergence from recession.

But is this rebound on borrowed time? China’s state-induced housing-market recovery appears to be cooling: prices fell in several cities at the end of last year, as Wheatley says, and the government will be wary of adding to the country’s huge debt pile with too much more credit-induced stimulus.

The other key question is how much damage any protectionist moves by Donald Trump would do to the global trading system. As far as MoneyWeek is concerned, valuations remain appealing, but we would stick to emerging countries with large domestic economies, which provide shelter from global turbulence: India and Indonesia are our favourites in this regard, while Russia is so cheap we feel it has priced in any downside.