Global Emerging Markets Equity 2016 Outlook

2015 was a mixed period for emerging markets, as the market often focused more on immediate macro-economic challenges than company fundamentals. This produced volatility, particularly in the third quarter. Investors were concerned about the potential impact of higher US interest rates, levels of debt and growth in China, and the impact of weaker commodity prices on commodity exporting countries.

While these concerns are reasonable, one should also remember that a Federal Reserve interest rate hike has been widely anticipated for some time, which means it should already be largely reflected in emerging market equity prices. As for China, while the level of corporate borrowing has risen significantly in recent years, most of this is local currency debt from state owned companies, so the risk to the economy is probably less than headline numbers suggest.

Finally, lower commodity prices do represent a challenge for some countries but they are having a positive impact on others, like India, where a lower oil price has given the government breathing room to improve its finances and reduce fuel subsidies.

Looking ahead to 2016, as bottom-up emerging market investors, rather than formulating top-down macroeconomic views on countries and regions, we ask ourselves the question… “As of today, can we identify many attractive, mispriced stock opportunities within emerging markets?” And the answer to that question is “yes”. For this reason we are optimistic on the outlook for our emerging market funds. We find a number of stocks experiencing positive change that we believe is not reflected in the price and we also believe that change-based investing is well suited to this fast changing and diverse investment universe.

China is one of the most important markets globally. While China faces challenges in managing a shift in its economy from an industrial model (where growth is driven by government investment) towards an economy driven by domestic consumption, we remain optimistic about the outlook for many Chinese businesses.

At the company level, we see significant differences between those businesses we think are able to embrace and benefit from the changing economy and those that we think are likely to struggle. It seems likely that this split will only become increasingly apparent as Chinese leaders continue to drive reforms, and returns within the economy will more noticeably diverge between these two categories of company.

Finally, it is worth noting that, today, emerging market valuations - in terms of price to book ratios - are relatively depressed versus history. At times when valuations have been at or around these levels, strong long term returns have often been available to investors willing to look beyond short term headwinds.

In many cases, we believe that this year’s volatility has created opportunities to add to oversold stocks that still enjoy a positive medium to long term outlook.

What is more, given that Emerging Market stocks have lagged behind developed markets, we should be able to find businesses with potentially better growth prospects – but significantly cheaper valuations – than their developed market peers.