In 2017, emerging markets delivered some of their best returns since 2009. However, a series of headwinds – which include a stronger US dollar, lower liquidity due to rising US rates, China’s attempts at deleveraging, and uncertainty surrounding trade – have now hit. This has meant some of those gains have been lost.

Yet, the selloff in emerging markets has not been indiscriminate. Countries that run both a fiscal and current account deficit and have a high level of US dollar debt have seen more weakness than those with relatively healthy external positions or willing to make policy changes to reduce imbalances.

We continue to be constructive on some Asian emerging markets such as China, South Korea, Thailand and Singapore, where the fiscal and current accounts appear to be in good shape.

China is trying to pivot away from an economy driven by fixed-asset investment to one that is more balanced, with a lower reliance on exports and a higher component of consumption. Trade tensions have introduced an element of uncertainty in the region and are causing a delay in investment decisions. This will likely have an impact on the profit outlook for the more cyclical or industrial companies, and this is consistent with the opportunity set we are finding among ‘defensive growth’ stocks.



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