Donald Trump’s first 100 days as US president are turning out to be just as controversial as his bruising election campaign.
A flurry of executive orders on border controls, trade and healthcare has dominated headlines, causing dismay and galvanising opposition.
The drama unfolding on a daily basis makes the modest comeback that developing markets have been enjoying all the more surprising.
The MSCI Emerging Markets index has risen by more than 15 per cent since the US election on November 8 last year, even though it fell by nearly eight per cent that month in part on fears that Trump’s policies would wreck global trade.
But what has caused this change of heart?
Clearly US stocks have given global markets a helping hand, with the Dow Jones Industrial Average Index crossing 21,000 for the first time back in February.
In particular, investors are hoping looser regulations, including the possible repeal of the Dodd-Frank Act, will help beleaguered banks.
However, flows to dedicated emerging market equity funds are turning positive, suggesting interest in the asset class on its own merits too.
A reason for this is that across the emerging markets corporate profitability has been improving, with net income margins for non-financial companies surpassing those of their counterparts in the developed world last year.
In addition, emerging market return-on-equity, which is another measure of profitability, is superior to the return of equity of European and Japanese companies.
Higher profitability has been helped by a recovery in commodity prices, amid a modest pick-up in global trade that has shown up in stronger exports.
What is more, lower capital expenditure has freed up cashflow to the benefit of balance sheets and, possibly, dividends.
The upturn is partly cyclical, as well as reward for years of hard work and corporate discipline. The measure of this opportunity is evident in asset allocations and valuations: global equity funds’ asset-weighted average exposure to emerging markets has fallen to some 8.5 per cent, from a ten-year high of around 16.5 per cent at the start of 2012.
Emerging market equities are trading at some 1.5 times book value, which is almost 16 per cent below the ten-year average.
Part of the problem is that investors see a world divided between “safe” developed markets and “risky” emerging markets.
However, following the shock results of last June’s Brexit vote and the US election this distinction clearly needs a reappraisal.
Almost a decade after the US sub-prime mortgage crisis, the country’s debt has grown by around 33 per cent to more than $45 trillion. Some members of the European Union are still one bailout away from going broke. Japan’s flagging economy, meanwhile, defies all short-term fixes.
At the same time, the world’s fastest-growing major economy is India, a country that is making great progress on business-friendly reforms.
China, where domestic consumption accounts for around half of the economy, has managed to restore stability even though concerns linger.
Elsewhere, prospects for Brazil and Russia – emerging markets that have been battered in recent years – are also looking up on higher commodity prices.
Developing economies, on the whole, are in much better shape than they were even a few years ago.
Economic and monetary policies are largely orthodox and paying off. Inflation is under control, or falling, so that central banks have room to cut interest rates to support growth. Their best companies have become experts at overcoming adversity.
One of Trump’s advisers coined the term “alternative facts” while defending the White House’s disputed assessment of the number of people that attended his inauguration. In a world where truth is subjective and orthodoxies are being overturned, emerging markets manage to look quite well grounded.
Hugh Young is head of investments at Aberdeen Asset Management.
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