Following a brief reversal of flows into emerging markets in the immediate aftermath of the US presidential elections, risk appetite resumed during the first quarter of 2017, resulting in strong net inflows of more than US$10 billion into emerging market equities.
As is often the case, these inflows coincided with and partly fuelled a strong performance across the asset class. The MSCI Emerging Market Index was up 11.5%, outperforming developed markets, which still grew a decent 6.4%, while the MSCI Frontier Markets Index returned 8.9%.
Asian and Latin American markets were particularly strong, while some (but not all) Eastern European markets were lagging behind, despite significantly improving macro-economic conditions and a stable oil price.
Globally, financial markets were dominated by political news. To start with the US, the Fed’s third rate hike was hardly noticed by investors more entranced with Trump’s inauguration, cabinet appointments and first executive orders. The message could not be clearer: it is “America First”.
A new world order – without the US sitting firmly in the driving seat and at a time when Europe has started the Brexit negotiations – could take shape, with transformed geopolitical dynamics as a result, and China taking centre stage in issues ranging from global trade to climate change.
In the future, we might look back at the period we currently live in and realize it was indeed a turning point; but it is obviously too early to tell.
In Europe, 9 months after the Brexit referendum, Article 50 was triggered, marking the start of a two-year negotiation spell that will probably not be easy. However, this process has little impact on our Central and Eastern European markets, where positive signs of macro recovery have been supportive to equity markets in general.
In our investment universe, there were also some important happenings politically, such as the National People’s Congress in China, the impeachment of President Pak in Korea, and the state elections in Uttar Pradesh in India. None of these had an immediate effect on markets, but they do matter for the long-term trajectory.
Despite political negative developments during the quarter, Turkey rebounded, on the back of a resilient economy and the fact that lots of the negative news had been priced in during the fourth quarter of 2016.
The Russian market has been hit by some profit taking and strong equity issuance. However, the investment case remains intact and our key active positions are doing very well.
All Asian markets this year are in positive territory, with the exception of Sri Lanka. This is obviously a positive backdrop in terms of investor sentiment and appetite for risk. More interestingly, one can notice the recovery in earnings and the interesting opportunities we find, for instance in various consumer spending-related sectors and clean tech. China A-shares offer a good opportunity in terms of growth profile and valuation.
Looking ahead, next month's presidential elections in France is an event that could affect the continent negatively with the far-right Front National candidate Marine Le Pen doing well. The French elections are very important for European cohesion, and are probably at the moment the number one risk for many investors around the world.
MSCI will also announce its annual review results, which have significant implications on many markets we invest in, notably in the frontier space, and also for the Chinese A-shares markets where we have been investing with a very good track-record since 2013.
Focusing on companies’ fundamentals is something our investment team has done for twenty years. There have been periods during which it was frustrating to see that it did not always pay off, as markets were clearly driven by other factors, such as sentiment and liquidity. But I am confident we are back in a time where it does matter to look at fundamentals in order to make fruitful investments.
