The international financial community expects 2016 to be a recovery year for emerging markets. After five consecutive years of sequential declines in economic growth, International Monetary Fund and consensus forecasts now look for a modest rebound, to roughly 4.5% from 4% in 2015. The improved outlook is expected to be anchored by stability in emerging Asia, and sharper recoveries in Latin America, Eurasia and the Middle East and North Africa. Emerging markets portfolio managers increasingly express optimism that there is value to be found in the EM investment universe.
Finding value in emerging markets in 2016 will require adept country allocation and risk management skills. In several key markets, unstable domestic politics — and evolving geopolitical uncertainties — now pose additional risks to growth and asset prices. This threatens the broader emerging markets growth recovery, and also casts doubts on the continued utility of emerging markets as a coherent concept and distinct asset class. Indeed, further differentiation in economic performance and asset price performance within the emerging markets world — and even within major EM regions — will remain a key investment theme in 2016.
Cyclical divergence between the U.S. and the rest of the world suggests emerging markets currency weakness will persist well into 2016. This creates policy challenges for many emerging markets, and perhaps especially for oil and other resource exporters, which might be forced to tighten domestic financial conditions at a time when the economic cycle would seem to call for easing. Less obviously, weak emerging markets currencies — especially if China cuts rates further to support growth — increasingly might generate negative spillovers from emerging markets into the broader global financial system.