Economic growth across many developing markets should continue to be higher than in the developed world in the near future, with some signs that this gap, which has narrowed for the past five years, may finally be turning higher. Those countries that push forward with reforms should do well, while countries that do not will struggle. Valuations are compelling and remain at a discount relative to their history and to their developed market peers. Our view is that we are likely to see a much more uneven world going forward, with less correlation and greater divergence in performance among countries and in stocks within those countries. We will remain focused on quality companies, as we continue to believe that those leading firms will weather the tough environment and will, in fact, improve their competitive positioning.

Near-term risks include a worse-than-expected slowdown in China or a breakdown in its financial system, an unexpected bout of risk aversion due to geopolitical events, or the potential for President-elect Trump to ratchet up his anti-trade rhetoric. However, we believe that investor concerns may be overdone. The extent of the Chinese growth slowdown remains a key question, but we believe policymakers have the tools to manage the transition and slowdown that is occurring in China. We believe President-elect Trump will prove more pragmatic with the checks and guidance of the Senate and the House of Representatives.

In our opinion, the impact that higher U.S. interest rates will have on emerging markets will prove less significant than investors fear. Expectations for stronger growth in the U.S. (tax cuts and fiscal spending) have also pushed inflation expectations and interest rates higher. Higher interest rates are reviving the concerns about lower capital flows, foreign direct investment, and weaker currencies within these emerging market countries. But broadly speaking, most emerging market countries are in better shape to weather this volatility, with improved current account positions, higher foreign exchange reserves, higher real interest rates, and currencies that, in most cases, have fallen over the past several years.

Overall, the environment will remain complex, but this should provide a good opportunity for active investors to take advantage of valuation anomalies. The emerging consumer remains a powerful force and should continue to drive strong growth in a variety of industries and companies, including retail, banking, technology, and the Internet. With investors skeptical, valuations attractive, and fundamentals bottoming, the environment appears positive for emerging markets equities and ripe for stock picking.