Investors in emerging market funds could see robust returns in 2016, according to Luca Paolini, chief strategist at Pictet Asset Management, and Stephanie Flanders (pictured), chief market strategist for Europe at JP Morgan Asset Management.
There is little doubt that global emerging equity markets have, despite an initial rally, had a dire year and have strongly underperformed their peers in the developed world.
The average fund in the IA Global Emerging Markets sector and the MSCI Emerging Markets index were both down more than 10 per cent at the time of writing. The best performing fund in the sector, Carmignac Portfolio Emerging Discovery, is up only 2.89 per cent year to date and is the only member of the peer group to be in positive territory.
Performance of fund, sector and index in 2015 
Source: FE Analytics
Of course it has to be remembered that there has been a huge divergence in performance of emerging market countries. For example, the MSCI Russia index was up 7.68 per cent at the time of writing but the MSCI Brazil index was down 39.87 per cent.
Dean Newman, Invesco Perpetual’s head of emerging market equities, says a slowdown in economic growth, exacerbated by renewed worries over China, has prompted further weakness in commodity prices and seen the US dollar strengthen considerably, which has been another major headwind.
“With profit margins being squeezed, companies here and elsewhere have also felt the pinch,” he said.
Performance of dollar versus sterling in 2015
Source: FE Analytics
However, this has made emerging market stocks cheap, Pictet’s Paolini says, making a strong case for being overweight emerging markets for 2016.
“We [have] raised emerging market equities to overweight as valuations for the asset class have become very attractive and we see signs of stabilisation of economic conditions across the developing world,” he said.
“Economic momentum is improving in China and there are signs that this economic strength is filtering through to other parts of emerging Asia.”
“This improving outlook for growth comes at a time when both valuations for – and investor positioning in – emerging equities reflect an excessive level of pessimism.”
Over at JP Morgan Asset Management, Flanders also agrees that a turnaround in pessimism could be a green light for a turn of fortunes.
“If global growth worries recede and US markets continue to take higher interest rates in their stride, there could be scope to boost returns later in the year through increased exposure to undervalued assets in emerging markets,” she said.
According to FE Analytics, the average fund in the IA Global Emerging Markets sector is down 17.58 per cent over five years, while the IA North America sector has returned 67.63 per cent over that time.
Performance of fund, sector and index in 2015
Source: FE Analytics
A 2016 bull run in emerging markets will be function of whether the key headwinds of US dollar strength and weak Chinese growth dissipate, says Allan Conway, head of emerging market equities at Schroders.
The research team at wealth manager Killik & Co point to the fact that emerging markets have now suffered from six consecutive years of declining economic growth rates after a decade-long boom but that stabilisation of this trend could signal a significant turning point for the asset class.
“The region as a whole has suffered from multiple headwinds in recent years. These have included the anticipation of a US rate tightening cycle, relatively benign growth from trade partners in the developed economies and a challenging transitioning process within key economies such as China, which has significantly impacted commodity prices,” it said.
“Given this outlook we believe allocations to emerging markets should be reviewed within portfolios.”
Garry White, chief investment commentator at Charles Stanley Direct, thinks emerging markets could have a better year, but adds that significant risks remain to the anticipation of rising interest in the US.
“This means that developed markets once again look like a better bet in 2016, despite the fact China is unlikely to have hard landing. However, it continues to looks like Europe, Japan and the FTSE 250 are good places for investors to seek exposure.”
Ross Teverson, manager of the £20m Jupiter Global Emerging Markets fund, also points to higher US interest rates as an understandable concern for investors, but argues the risk is already in the price.
“While these concerns are reasonable, one should also remember that a Federal Reserve interest rate hike has been widely anticipated for some time, which means it should already be largely reflected in emerging market equity prices.”
