In recent years, interest in emerging markets, which was fueled by hopes of high returns, had faded. Now, the former stock market star is back in the limelight, Bank Vontobel's Alex Fung writes.

The global financial crisis, along with plunging commodity prices and emerging market currencies, saw investors' attention wandering astray. The strong rally of the MSCI Emerging Markets Index since a low in early 2016 has brought the former stock market star back into the limelight.

Heightened Interest Once Again in Emerging Markets

  • Strong growth of the global economy spurs on emerging markets
  • We expect an uptick in economic activity with stable inflation for the emerging markets
  • In particular, the Asian emerging markets have more robust and better-diversified economies than before

Investors Rediscover Emerging Markets

On the one hand, short-term factors are playing a role here, such as decreased risks of a protectionist US trade policy, the recovery in the prices for oil and industrial metals, the greater appetite for risk on the markets and attractive evaluations for emerging market securities.

On the other hand, «hard» economic data and positive structural changes in the emerging economies are also attracting international capital.

High Economic Growth Rates

According to calculations made by the International Monetary Fund (IMF), the emerging markets can expect growth in per capita GDP of 32 percent in the next five years. This means the growth story of the past is continuing.

The heavyweight in the pack remains China, which despite any worries about a hard landing for its economy, has proven to be surprisingly robust. In the second quarter of the year, the extrapolated annual growth rate was 6.9 percent, which was not only faster than in the same period in the previous year, but more than widely expected. The World Bank recently upgraded its growth forecasts for the world's second biggest economy both for this as well as next year.

The sentiment in Chinese companies is excellent too. For example, the official Purchasing Managers Index of manufacturing industry in September surged to a five-year high, that of services sector to a three-year high.

More Stable and Better-diversified Economies

While emerging markets used to be regarded primarily as a play on commodities, they currently benefit from numerous additional factors. Asian economies, in particular, have put their budgets in order, reduced debt and build up foreign currency reserves; as a result, they are frequently less indebted than the industrial countries. Consequently, they are now better prepared for a potential increase in dollar interest rates than in the past.

They are also structurally more stable through the reduction of their dependence on commodities. Diversification of industry and strong growth in domestic consumption has focused attention on emerging market securities especially from the sectors finance, consumer staples and above all IT.

The share of commodity companies in the stock market capitalization of emerging markets has accordingly fallen from 30 percent around the turn of the millennium to only 15 percent today.

Where Can Investors Profit Especially?

The enhanced interest of investors, the renewed increasing growth dynamism and structural improvements are currently combined with moderate valuations and weak currencies in emerging markets. This makes a commitment even more attractive.

However, as before, there continue to be great differences within the emerging markets. Before making any investment decisions, it is therefore best to speak with experts who have the necessary expertise to pick underlying instruments in these markets.

Alex Fung has been Vontobel's Chief Executive for private banking in Asia-Pacific since 2014. Prior to joining the Swiss bank, he was the chairman of Société Générale's Asia activities and Chief Executive in Hong Kong. He began his career with Canadian Imperial Bank of Commerce, or CIBC, as a bond trader in London before eventually moving into wealth management in Asia for the Toronto-based lender. Fung is based in Hong Kong.