Which Way for Emerging Markets in 2017?

The prevailing economic forecast for 2017 predicts that, under President-elect Donald Trump’s incoming administration, the US will expand its fiscal-stimulus policies, the dollar will strengthen, and emerging markets will suffer. But there are four reasons to doubt the conventional wisdom.

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LONDON – Casual observers might think that 2016 was a disappointing year for so-called emerging markets. In fact, some of these countries have delivered the year’s best investment returns, while certain developed-country markets have fared poorly. If a United Kingdom resident who has personal obligations in Brazil had hedged all of his Brazilian real into sterling at the start of the year, he would have lost almost 50% of his investment.

Indeed, Brazil is not the only emerging country whose markets performed better than expected in 2016. But this is easy to miss when, more than 15 years after I coined the BRIC acronym (Brazil, Russia, India, and China), people are still lumping a diverse range of countries into a single “emerging markets” category which confuses more than it illuminates.

This approach makes little sense: there is nothing “emerging” about South Korea, whose per capita GDP is close to that of the less wealthy eurozone countries; or about China, where the United States’ most iconic company, Apple, sells more products than it does in the US itself. Most successful investors probably figured this out some time ago, but others should take note of it in the coming year.

Right now, the prevailing emerging-market outlook for 2017 predicts that, under President-elect Donald Trump’s incoming administration, the US will expand its fiscal-stimulus policies, and that the US Federal Reserve will tighten monetary policy. This, in turn, will strengthen the dollar, which could create widespread problems in emerging markets.