The election of Donald Trump late last year marred the long-awaited rebound in emerging markets, seen early in 2016 after years of underperformance.
But sources are split on the impact Mr. Trump will have on the U.S. government's relationship with various emerging markets countries — China and Russia in particular — and how it will affect institutional investors.
On one side, the potential for tariffs and trade wars has some consultants and money management executives cautious on the asset class. On the other, Mr. Trump's rhetoric toward Russia has brought the previously unloved country back onto the list of opportunities for investment.
The MSCI Emerging Markets index gained 11.2% in 2016, outstripping a return of 8.4% for the MSCI All-Countries World index. That compares with a 14.7% loss for the MSCI Emerging Markets index in 2015, while the MSCI ACWI returned -1.9%.
Emerging market equities valuations remain attractive, and fixed income is benefiting as inflation ticks down in some of the previously troubled countries, such as Brazil and Russia.
But even that is not enough to alleviate fears for these markets.
“What is holding us back from a broader communicated overweight that is really aggressive are two of the risks out there,” said Phillip R. Nelson, director of asset allocation at NEPC LLC, in Boston. Both, he said, are well known. “The more relevant to us is what's going on in China and policies in China. The general easing, ability for credit to grow, some of the stimulative policies out of the central bank and government in China is broadly supportive for emerging markets and China.”
Should that reverse, “it would raise some concern,” he said.
Mr. Nelson also warned that while the depreciation of the Chinese currency has been managed, any rapid depreciation would bring volatility to other Southeast Asia currencies. “That is not an insignificant risk in our minds.”
China also is a risk for David Morton, a partner and chief market strategist at Rocaton Investment Advisors LLC in Norwalk, Conn. “China is a worry — in the last 18 months (the government and central bank) have managed to create some stability, or seeming stability,” despite a weakening of the currency. “If volatility increases in Chinese markets and the economy, the rest of the world's financial economy may come under pressure. As for the last few years, China continues to be a big wildcard,” said Mr. Morton.