Emerging markets pick up steam

published 24 February 2017

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-Japanthis year, an improvement on 3% in 2016.

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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'sWillem 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.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.