Emerging-market investors have had a torrid time in recent years, but things have been looking up in 2016. The MSCI Emerging Markets index has jumped by more than 30% from its post-crisis low in January. Many of the trends that had rattled emerging-market investors "have reversed, or at least halted", says Will Railton of City AM.
Many developing countries depend on commodity prices, and these have ticked up again this year after a nasty slide, led by oil. Meanwhile, the worst of the recessions in emerging-market heavyweights Brazil and Russia appear to be over, and growth in Asia has strengthened, underpinned by healthy consumption.
This year has yet to see an interest-rate increase by the US Federal Reserve, which has buoyed sentiment. Higher US rates draw capital away from risky assets. At the beginning of the year, markets were pencilling in four Fed rate hikes, but we are still waiting for 2016's first.
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Even if rates do rise faster than expected from here, however, emerging markets should be able to weather the storm, says Capital Economics. Unlike three years ago, when the end of monetary easing and the prospect of US rate hikes severely rattled emerging-market investors, current-account deficits are under control.
Large external deficits make countries more vulnerable to capital outflows, since foreign money is needed to plug the gap. What's more, past form suggests that emerging-market stocks can shrug off US monetary tightening if investors are confident in the outlook. In local currency terms, emerging markets were up a year after the first rate hike in the 1994 and 2004 tightening cycles.
Emerging markets are also becoming more diversified. Commodities only comprise 14% of the MSCI Emerging Markets index now, less than half the proportion ten years ago. Key growth sectors such as telecoms, technology, health care and consumer firms account for around half the index, according to Ashmore Investment Management. Throw in very reasonable valuations, and the rebound looks set to endure.
