October 2016

Update on Emerging Markets:
Looking East

Emerging markets have rallied strongly in 2016, but the outcome of the U.S. election has raised new concerns about whether the rally can continue. We see further upside potential given improvement in macroeconomic fundamentals, subdued inflation, reform momentum and stronger earnings. EM still appears reasonably priced, but we suggest investors be selective, particularly as valuations climb higher. We favor selective areas of opportunities in emerging Asia, namely India,
Indonesia and China.

Looking East

A number of reasons drive our strategic preference for emerging Asian assets.

  1. Economic fundamentals
    Macroeconomic fundamentals, including growth momentum, inflation trends, debt ratios and current accounts, are generally more favorable in emerging Asia than other EMs. As mainly net commodity importers and with lower external debt ratios, Asian economies are less vulnerable to a strengthening U.S. dollar, which remains one of the main risks to the outlook for emerging markets.
  2. Policy support
    The prospect of political change in many countries is driving expectations of structural reforms. This is particularly true in India, where recent successes include the flagship goods and services tax (GST) bill. In addition, some Southeast Asian economies are seeing progress on policies aiming to increase productivity and boost private and foreign investment. For example, in Indonesia and the Philippines, a drive for fiscal stimulus in areas such as infrastructure has the potential to bolster growth going forward, and further political changes in the region may contribute to lowering the overall risk premium of EM Asian assets.
  3. Improving earnings against a backdrop of attractive valuations
    From an equity market perspective, earnings revisions are improving across emerging markets, with Asia currently showing higher levels of return-on-equity. Asian equity dividend yields (DYs) currently rival those of developed markets. Although lower than other EM regions, we like that Asian DYs are not as exposed to commodity producers as in other parts of EMs. EM Asian equities also remain attractive relative to both emerging and developed markets across a number of valuation metrics.

EM Asian countries to watch

EM Asian countries to watch


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Authors
Head of Investment Strategy for U.S. iShares
Investment Strategist for the iShares Investment Strategy and Insight group