Emerging market equities rallied for the second consecutive year in 2017 and once again outperformed developed market stocks. In contrast to 2016, when the market re-rated in advance of an earnings recovery, last year’s performance was underpinned by earnings coming through.
Technology stocks drove the rally. The sector returned over 60% in 2017 in US dollar terms and made the largest contribution to the market’s overall return. It accounted for more than 40% of the performance of the MSCI Emerging Markets Index, though it represents less than 30% of the index.
As value-oriented investors, we are finding attractive opportunities among more economically sensitive sectors such as financials, which in our view should benefit from the improving macroeconomic environment through increased lending and lower levels of bad debt.
After two years of impressive gains, we remain optimistic about the outlook for emerging market equities. The improvement in company fundamentals looks sustainable and should continue to support the asset class.
Better capital discipline and cost controls by company management teams are underpinning the increase in profitability. In our view, this upturn in fundamentals is yet to be fully reflected in valuations.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.