Equities in Emerging Market Surge as Growth Expectations Rise in 2017
Emerging markets in 2016
Emerging markets started on a weak note in 2016, as equities dropped in concert with concerns around China’s economy and falling oil prices. However, by the end of 2016, the positive developments improved investor sentiment, leading to emerging markets gaining momentum by the end of 2016.
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These positive developments included the rise in crude oil prices and improved economic activity in the US. Global economic activity is also likely to pick up, with the changing domestic policy mix under President Trump’s administration and its global spillovers.
However, markets have been jittery with the Trump administration’s failed attempt to implement these policy changes. The chart above details some of these global growth expectations.
Global GDP growth
According to the International Monetary Fund’s (or IMF) January 2017 outlook, economic activity is expected to pick up the pace in 2017 and 2018, especially in emerging markets. We can see in the chart above, the GDP growth for emerging economies is expected to be 4.5% in 2017, compared to 4.1% in 2016.
The outlook for developed economies has also improved for 2017–2018, due to stronger activity in the second half of 2016 as well as a projected fiscal stimulus in the US.
According to the Institute of International Finance, emerging economies likely expanded 4.5% in 1Q17, beating its forecast. Bryan Carter, head of emerging debt at BNP Paribas Investment Partners, said, “Emerging markets have been strengthening from the fundamental case for several months. We made the decision back in September that emerging GDP growth rates … were re-accelerating, so we thought we were back in a bullish cycle,”
Emerging markets equities continued their 2016 recovery in 1Q17, with a resurgence in global economic activity. The emerging market surge was mainly a reflection of strong gains in January, leading to a decline in February and March 2017.
These emerging markets were driven by macroeconomic factors and fundamental improvements, including rising commodity prices (DBC) (GSG), improved global recovery, stronger earnings, and gradual US policy changes.
Emerging market ETF performance
In 1Q17, emerging markets outperformed the global benchmarks. The iShares MSCI Emerging Markets ETF (EEM) gained about 12% in 1Q17. The global benchmark, the SPDR S&P 500 ETF (SPY), gained about 4.6% in 1Q17.
The all-country world index, the iShares MSCI ACWI ETF (ACWI) performed slightly better than its US counterpart, with gains of ~6% in 1Q17. This ETF includes global stocks across various sectors and market capitalization levels.
In the next article, let’s look at the impact of increasing share of emerging market in global growth.