Fundamentals across some emerging market regions are misunderstood and, despite the sector falling out of favour, it is still yielding some attractive investment opportunities, according to a number of industry professionals.
This comes following a shaky performance from the MSCI Emerging Markets index over recent months, as expectations of US fiscal expansion boosted confidence in developed markets and led to pullbacks on regions with dollar-denominated debt.
Performance of indices since Q4 2016
Source: FE Analytics
This is a far cry from the first half of 2016, when emerging markets rallied after investors shunned regions facing high levels of geopolitical risk, such as the UK, the US and Europe.
Does this mean last year’s short-lived emerging market rally is over for 2017, or does the sector still have further to run?
In the below article, fund managers and investment commentators give their thoughts on which of the four BRIC countries – among the largest emerging market economies accessible to investors – they believe could do well this year.
Robin Geffen: Russia
Robin Geffen (pictured), who runs a number of global equity and multi-asset funds for Neptune, believes the best is still yet to come for Russia, despite investors already being rewarded for their patience over the past 18 months. 
“Within emerging market funds Russia is still an underweight. As a market it is also still generally under-owned and misunderstood within a global equity context too,” he said.
“Around the world in 2016 the shocks came from politics, not economics, with Brexit and a US presidential election amongst the political surprises for most people.
“The political landscape in Russia is very stable compared with much of Europe, meaning that the main determinant of the Russian stock market will be its improving economic outlook.”
Geffen says there are three major positive economic drivers for Russia. Firstly, he says falling inflation in the country will lead to a rate cut, which will subsequently boost economic growth.
Another reason the Russian economy will fare well, according to the manager, is that fundamentals for oil have improved which will provide a boost for the oil-exporting region.
“At the current oil price, the Russian government is also incentivised to continue its successful economic reform program, which will be a further boost to the stock market,” he continued.
“The Russian stock market is not just about high quality oil and gas companies; there are very high-quality companies across other sectors like metal and mining, industrials, consumer and technology and telecoms. Many of these companies offer good long-term value and still sit at depressed valuations.
“Given that Russia-US relations are at a multi-decade low, the change in US president means that this relationship can only improve from here. Whereas one cannot expect sanctions to come off in the very short term, there is no doubt that this is highly likely in the medium term, which would provide another good boost for both the rouble and the Russian stock market.
“Round the world there are many well-loved markets close to all-time highs and with high levels of expectations built in. The Russian stock market is unloved, under-owned and offers excellent long-term value, and for a real world investor these are compelling arguments.”
Gary Greenberg: India
Greenberg, who manages the five crown-rated Hermes Global Emerging Markets fund, describes India as the “last real emerging market” and therefore believes it has greater scope for growth than many of its peers.
While India was the darling emerging market economy of 2015, an increasing lack of confidence as to whether prime minister Narendra Modi would push ahead with his economy-friendly policies led to the country struggling to keep up with last year’s bull run.
Performance of indices over 1yr
Source: FE Analytics
Greenberg believes this, combined with continually strengthening economic fundamentals, has led to attractive buying opportunities in the country.
“India continues to juxtapose the medieval with the hypermodern. Under the progressive influence of prime minister Narendra Modi, promising structural reforms are being introduced that should enable this emerging market to blossom,” he said.
“Administrative, legislative and supply-side reforms are taking place at a national level, but India’s federal system means that progress within states is key. Modi’s attempts to foster ‘co-operative federalism’ to spur state-driven projects are gaining traction.”
The manager says India’s “impressive” growth is mostly being generated through increased spending on infrastructure and agriculture.
That said, he says the country’s economy still has room for improvement given its weak industrial production, corporate credit, exports and freight traffic.
“Progressive India favours well-run, quality companies that are focused on innovation and are exposed to structural trends,” Greenberg explained.
“Conglomerates relying on subsidies or short-term cyclical drivers may prove to be risky investments as the country emerges.”
Jan Dehn: Brazil
Ashmore’s Jan Dehn describes Brazil as “the gift that keeps on giving” and says that, despite its significant outperformance over the last year, the country still has further to run.
“The Brazilian super-goldilocks scenario is rapidly unfolding as inflation moved within the central bank’s target range and growth picked up amid rate cuts and currency appreciation,” he said.
“Inflation fell to 6.29 per cent year-on-year in December versus the central bank’s year-end target of 6.5 per cent year-on-year.
“This allowed the conservative central bank to up the pace of rate cuts to 75bps with plenty of room for further cuts as the policy rate still sits at a very elevated 13 per cent.”
As such, he says Brazilian bonds are the most attractive among emerging markets at the moment and that, broadly speaking, emerging market bonds are more attractive than developed market bonds.
“We continue to see considerable upside since inflation has had more room to decline,” Dehn said. “The central bank’s inflation target for 2017 is 4.5 per cent as speculation mounts that the central bank will lower the target for 2018 to just 4 per cent.
“We also expect the Brazilian real to appreciate amidst further rate cuts and a gradual return to positive growth (the four ingredients in ‘super-goldilocks’). Indeed, there are already tentative signs of a stabilisation in economic activity as retail sales rose significantly in November, beating very bearish expectations.”
Josh Crabb and Helen Zhu: China
Many investors have been bearish on China over recent months due to fears that the economy may encounter a long-anticipated hard landing as a result of potential trade wars with the US.
However, Josh Crabb – head of Asian equities at Old Mutual Global Investors – says that some of this anxiety is already discounted in markets, given the valuation gap between the equities and their US counterparts.
Performance of indices over 1yr
Source: FE Analytics
“China has been roundly criticised for exporting deflation around the world, through the mechanism of currency manipulation – a particular bugbear of Trump’s. But the rise in the Chinese producer price inflation (PPI) index, a key indicator of China’s growth being on track, puts paid to such accusations,” he said.
“More widely, Asian corporate earnings are experiencing something of a revival. The bottom line is it’s in nobody’s interests to adopt a policy of splendid isolation. Trump is a dealmaker. It is highly likely he will undertake deals in Asia. Given that these economies are in sound economic health compared to a decade ago, we remain positive on the outlook for Asian equities, with a continued focus on the economically sensitive sectors of financials and industrials.”
Helen Zhu, BlackRock’s head of China equities for the Fundamental Equity division, also believes China’s macro data will continue to paint a strong picture with industrial profits growth improving further.
“We expect to see more upside in earnings in this environment. Against this backdrop, there are opportunities in the materials and energy sector in the Chinese equity market,” she said.
“We expect structural reforms to continue to come through and expand in scope. This will be key to ensure the economy keeps expanding but more importantly gains in quality with better reliance on domestic consumption and efficient domestic markets and corporates.”