Emerging market (EM) equities pulled back in 2018, decoupling from US equities due to trade disputes, rising interest rates, a stronger US dollar, and rising political risks. With these factors behind us, a potential US and China trade resolution on the table, and an end to the US Federal Reserve’s rate hiking cycle, we believe EM equities are attractive on an absolute and a risk-reward basis.
We remain positive on the asset class and believe that the rare combination of compelling valuations, higher growth potential, and attractive positioning will create opportunities for a re-rating of the asset class. Looking ahead, we believe that emerging markets are positioned for a significant rally in 2019.
After six years of underperformance relative to developed markets, EM pivoted into a multi-year positive cycle in 2016. Idiosyncratic events interrupted the turnaround in 2018, but also created an attractive opportunity for active investors as prices dislocated from fundamentals. The asset class regained its strength towards the end of 2018, as the market digested a potential US-China trade resolution along with a dovish stance from the US Fed. We believe that current conditions remain supportive for a multi-year rally in EM, and note that emerging market cycles have historically lasted six to eight years.