Reasons to like emerging markets

Risks to emerging market (EM) equities and bonds have increased since the U.S. election, with the incoming Trump administration’s policies on trade uncertain. Yet we see positives—including a cyclical growth pickup benefiting EMs—outweighing the risks and supporting a selective approach. This week’s chart helps explain.

Past performance is no guarantee of future results. Index performance is shown for illustrative purpose only. You cannot invest directly in an index.

EM equities and bonds took a hit immediately after the U.S. election, as investors feared the new administration would be negative for global trade and capital flows. As the chart shows, industrial metals and other commodities quickly rebounded on hopes for infrastructure spending and amid signs of a pickup in global growth.

Scope to play catch up

EM assets have stabilized somewhat since, but lagged a rally in commodities . Our conviction is that U.S.-led reflation—rising wages, nominal growth and inflation reinforced by an expected shift to fiscal stimulus—should be a big positive for many EM assets. Greater infrastructure spending should boost demand for the commodities exported by EM producers.

Risks abound in the short term, including a sharper rise in U.S. Treasury yields and the U.S. dollar as well as a quicker fall in China’s yuan. But we believe a gradual Federal Reserve, wary of tighter financial conditions, should limit dollar gains from here. Over the past three years, EM assets have already weathered an economic downturn and dollar appreciation: Currencies are weaker and current account balances are generally in better shape. Commodity markets, a key source of earnings for many EM companies, have found a better demand/supply balance—including crude oil after the Organization of Petroleum Exporting Countries (OPEC) decided to cut supply last week.

We like selected commodity-producers but are wary of manufacturing countries vulnerable to a tougher U.S. stance on trade. We prefer countries where structural reforms show a willingness to sacrifice short-term economic pain for long-term gain, such as India’s move to eliminate high cash denominations. Finally, we prefer hard-currency EM bonds—particularly high-yielding oil exporters such as Russia, Colombia and Kazakhstan—and short-duration local currency bonds in some countries. Read more market insights in my Weekly Commentary .

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog .