Global Emerging Markets 2018 Outlook

Emerging markets have had a very strong 12 months, driven by a confluence of factors. Here, Kim Catechis outlines why the structural backdrop remains so attractive going into 2018.

11 January 2018

What were the key drivers of markets last year?

Emerging markets enjoyed a spectacular year in 2017, driven by a combination of factors, including a strong earnings recovery, relatively stable currencies, strengthening economic growth and trade, as well as a generally benign start to the US Federal Reserve’s (Fed) upward interest rate cycle. These positive influences essentially overrode the challenges and uncertainties arising from a widespread phenomenon of political realignment and geopolitical tensions. In many countries, such as Brazil and South Africa, the uncovering of wideranging corruption scandals in public sector procurement have led to the destruction of long-standing political party structures – a necessary precursor to the establishment of good governance.

GEMs 2018 Q1 Outlook Play Play Video
Global Emerging Markets Q1 2018 Outlook

Kim Catechis gives his views

Did your strategy perform as you would have expected in 2017?

Against a backdrop of excellent returns for the asset class as a whole in 2017, the portfolio performed strongly in both absolute and relative terms over the course of the year, as the companies held generally delivered above market expectations. Overall, the biggest gains came from the portfolio’s positions in consumer discretionary, financials and technology, all three benefiting from the growth of the middle-income consumer in emerging markets. There were only two sectors where we had negative relative returns – industrials and real estate.*

What do you think will be the key drivers for your markets in 2018?

Technology will remain a prominent driver in emerging markets, with the rapid development of new applications creating significant business opportunities, while also challenging companies that are slow to adapt. The increasing weight, in economic and political terms, of the new entrants to the middle income group in each country will continue to be a strong theme, benefiting consumer trends. Meanwhile, we expect to see a continued drive to improve governance in domestic politics which will shape economic policy. Not to forget the exponential growth in trade between emerging market countries – often overlooked amid all the talk of rising global protectionism – which provides a very supportive backdrop for growth. Finally, the higher priority given to environmental considerations (such as China’s focus on clean air and water) will drive further development of non-polluting technologies such as electric vehicles and renewable energy.

Technology will remain a prominent driver in emerging markets, with the rapid development of new applications creating significant business opportunities, while also challenging companies that are slow to adapt.

How are earnings revisions and valuations looking relative to historic averages and other markets?

It is clear from the 2017 third-quarter earnings that the asset class has marginally outperformed the markets expectations for earnings growth for the year, driven by the technology, consumer staples and materials sectors. In terms of disappointments, the telecommunications sector featured high, driven in no small measure by the wireless subsector, where results missed analysts’ expectations.

From a valuation perspective, the asset class currently stands at a 12-month forward price-to-earnings ratio of around 12.4x, which is above the 10-year average of 11x. However, we should not forget that the nature of the asset class has changed – the technology weighting in the index and the reduction of the materials and energy sector imply that the structural level of return on equity (ROE) will be higher than in the past, and the level of debt to equity will be lower, thus justifying a significantly higher median valuation for the asset class.

What are the biggest risks to your markets in 2018?

An obvious risk is the possibility of an escalation of tensions on the Korean Peninsula, with outright war the most extreme scenario. Needless to say, this would affect global – and not just emerging – markets. In the economic realm, there’s an outside chance a sharp rise in inflation in the US, leading to a faster-than-expected increase in interest rates by the Fed, could cause some volatility in emerging markets. There’s also the worry that Chinese economic growth takes a nosedive – the ‘hard landing’ that has been talked about for years, but not materialised. Importantly, we assign very small probabilities to all of these outcomes.

What sustainability themes do you see yourself engaging with companies on most in 2018?

We will continue to engage with companies on any material environmental, social and governance (ESG) issues we identify, which of course can vary a great deal from company to company. We know from experience that improvements in these areas don’t come from short, sharp battles. Rather, lasting improvements tend to require many years of consistent and patient engagement with management. In terms of the types of themes we would expect to see more often, we would point to governance, especially in the areas of board composition and disclosure. Elsewhere, we also foresee important areas such as climate change and cybersecurity featuring high in our engagement. In the case of the former, we want companies to evidence that they are thinking not just about operational consequences from threats like extreme weather and water scarcity, but also about the strategic opportunities presented by decarbonisation.


We will continue to engage with companies on any material environmental, social and governance (ESG) issues we identify, which of course can vary a great deal from sector to sector. We know from experience that improvements in these areas don’t come from short, sharp battles.

*Source: Martin Currie over 12 months to 31 December 2017 in US$. All data presented is the representative Martin Currie Global Emerging Markets account. Data is presented net of investment advisory fees, broker commissions, and all other expenses borne by investors. An annual fee rate of 0.70% has been applied for the net data. MSCI Emerging Markets index used as benchmark. Relative calculation is geometric and stock performance is taken from the representative account.
Source: FactSet, as at 15 December 2017.


Important information

Past performance is not a guide for future returns

Investors should also be aware of the following risk factors which may be applicable to the strategy.
Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. Accordingly, investment in emerging markets is generally characterised by higher levels of risk than investment in fully developed markets.
For Investors in the USA, the information contained within this document is for Institutional Investors only who meet the definition of Accredited Investor as defined in Rule 501 of the United States Securities Act of 1933, as amended (‘The 1933 Act’) and the definition of Qualified Purchasers as defined in section 2 (a) (51) (A) of the United States Investment Company Act of 1940, as amended (‘the 1940 Act’). It is not for intended for use by members of the general public.
Any distribution of this material in Australia is by Martin Currie Australia (‘MCA’). Martin Currie Australia is a division of Legg Mason Asset Management Australia Limited (ABN 76 004 835 849). Legg Mason Asset Management Australia Limited holds an Australian Financial Services Licence (AFSL No. AFSL240827) issued pursuant to the Corporations Act 2001.

This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice.
Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested. The document may not be distributed to third parties and is intended only for the recipient. The document does not form the basis of, nor should it be relied upon in connection with, any subsequent contract or agreement. It does not constitute, and may not be used for the purpose of, an offer or invitation to subscribe for or otherwise acquire shares in any of the products mentioned.
The information contained has been compiled with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this document for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.
The opinions contained in this document are those of the named manager(s). They may not necessarily represent the views of other Martin Currie managers, strategies or funds.