Relative to other asset classes, emerging markets have outperformed in 2016, according to VanEck portfolio manager David Semple – and there is “reasonable evidence” that it will continue.
“Broadly speaking, a stable US dollar, better commodities’ prices, a more resilient earnings profile, and light positioning in the asset class ought to combine to increase the relative attractiveness of emerging markets,” Mr Semple said.
However, much of the outperformance in emerging markets has come courtesy of large-scale state-owned enterprises, he said.
“The prominence of these companies we feel comes less from superior competence than from historically state-sponsored systemic advantage, which is unlikely to be sustained in the long run,” Mr Semple said.
“In addition, many of these large companies are essentially driven by global cyclical factors such as energy and materials.”
Valuations for emerging markets equities and currencies are generally “constructive”, but not “compellingly cheap”, Mr Semple said.
“Expectations for earnings are much more realistic, and positioning in the asset class is cautious. Delayed expectations of further [US Federal Reserve] tightening have also been positive for the asset class,” he said.
“Finally, it is perhaps hard to construct a case for alternative geographies and asset classes; arguably, the US equity market looks overvalued, Japan is struggling with a strong currency and Europe faces significant questions and uncertainties surrounding its political and economic future.”
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