World investment outlook 2017: The rest of the world

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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

The world investment outlook is written by Russ Mould, AJ Bell Investment Director and contains a wealth of information on the world financial markets and events to help with your investment strategies in 2017.

Here he considers the outlook for the rest of the world.

The three key issues for 2017

  • The dollar and whether any sustained strength in the greenback proves negative for emerging market assets (as has tended to be the case since the 1990s)
  • Commodity and particularly oil prices will go a long way to shaping the economic fortunes of many emerging markets
  • Any President Trump-inspired shift in US trade policy toward tariffs on emerging-market produced goods could have a damaging effect

Politics

In Eastern Europe, Vladimir Putin and Recep Tayyip Erdoğan dominate. After a win for United Russia in the autumn 2016 Parliamentary ballot, Putin can now prepare for the 2018 Presidential poll in his bid to secure a second consecutive term for an unprecedented second time, while his Turkish equivalent is using July’s failed military coup as grounds for cementing his power in an autocratic matter, despite his consistent calls for full recognition of the democratic process.

President Xi Jinping is no less dominant in China and the 19th Communist Party Congress is likely to be the defining event in the Asian political arena in 2017, not least because these twice-in-a-decade meetings are vital staging posts for ambitious members.

The 63-year old Xi looks like a shoo-in for a second term as General Secretary so the real interest may lie in who makes it onto the Politburo, as the majority of the 25-man body will be stepping down this time around, and particularly the seven-man Politburo Standing Committee, where five of its members may retire. This reshuffle will open the way for others to step up and stake a claim for even higher office in 2022.

The situation is less clear cut in Latin America. A shift from the left to centre-right leaves Michel Temer and Mauricio Macri looking to push through social, economic and political reforms in Brazil and Latin America while 2017’s elections in Chile and Ecuador will be the next test of the right-ward swing. The former’s Michelle Bachelet is barred from standing by the constitution while the latter’s Rafael Correa is rumoured to be thinking of sitting out this poll after a decade at the top.

Economics

The IMF expects emerging and developing European GDP to rise by 3.3% in 2017, a slight deceleration for the 3.5% rate expected for 2016. Higher oil prices and improved economic momentum in the EU, a key trading partner, would both provide welcome tailwinds and Russia is finally expected to crawl out of a deep recession in 2017.

Turkey is still struggling with inflation and unemployment in the 8% to 10%, as well as a currency that has gone through the floor following the failed summer coup. There remains the risk that further political unrest could choke off the capital flows required by Istanbul to support its current account deficit, necessitating the sort of interest rate rises that would potentially make the unemployment situation a lot worse.

The Turkish lira fell hard and fast in 2016

The Turkish lira fell hard and fast in 2016

Source: Thomson Reuters Datastream

With President Xi having nailed his colours firmly to a target of 6% to 7% GDP growth a year out to 2020, under the current Five Year Plan, it would be unwise to expect China’s headline numbers to show anything less or for the authorities to slacken in their efforts to achieve them.

If those headline numbers are for real, then that could help commodity producers like Brazil. The 2014 World Cup and 2016 OIympics have come and gone yet Brazil is stuck in a deep recession and dogged by the sticky inflation that has obliged the Banco do Brasil to jack up its headline Selic interest rate to 14%. Rising oil, iron ore and sugar prices at least represent some good news for President Temer as he seeks to undo the damage done by years of profligate spending under his predecessor Dilma Rousseff .

Doubts do linger about the quality of Chinese growth, given the alarming way in which debt is piling up as the currency heads south. The renminbi’s inexorable slide is a real source of concern, especially as a minor wobble around RMB 6.50 to the dollar sparked a nasty bout of global financial market turmoil in summer 2015. The currency is heading toward RMB7.00 to the dollar as 2016 draws to a close and if trade relations between China and America do go sour, then the renminbi could become a key weapon in any battle of wills between Presidents Xi and Trump.

China’s renminbi is heading steadily lower

China’s renminbi is heading steadily lower

Source: Thomson Reuters Datastream

Markets

Inspired by a first-half surge in gold and silver and second-half gains in sugar, iron ore and oil, emerging markets actually did best of all of the major regions in 2016, ending a four-year stretch of underperformance relative to developed arenas. Eastern Europe and Latin America led the charge higher with Africa and the Middle East not far behind.

Emerging markets topped the equity performance charts in 2016

Emerging markets topped the equity performance charts in 2016

Source: Thomson Reuters Datastream. Shows total returns in sterling terms from 1 January to 19 December 2016.

Any sustained commodity price strength through 2017 could help, as this long-term chart of the Bloomberg index for 22 raw materials relative to the MSCI Emerging Markets equity benchmark suggests:

Commodity price strength could help emerging markets, if history is any guide

Commodity price strength could help emerging markets, if history is any guide

Source: Thomson Reuters Datastream.

However, a strong dollar is usually seen as bad for commodity demand as those raw materials are priced in greenbacks so a bouncy buck makes them more expensive and can potentially hit demand. A rising dollar is therefore traditionally seen as negative for emerging stock markets, as it hits one potential growth engine and also makes servicing overseas (dollar-denominated) debts more expensive – the Mexican and Asian debt crises of the mid-to-late 1990s were classic examples of this.

Dollar price strength has historically hampered emerging markets

Dollar price strength has historically hampered emerging markets

Source: Thomson Reuters Datastream.

The direction of US interest rates will therefore be very important to emerging markets in 2017, as a string of Federal Reserve rate rises could drive further gains in the dollar although as 2016 ended the dollar and commodities were rising in tandem.

According to research from Bank of America Merrill Lynch commodities only rise one-third of the time when the dollar is on the march, but this combination has historically been very good for emerging stock markets when it has occurred.

Top performing funds

Best performing Global Emerging Market Equity OEICs over the past five years

OEIC Fund size £m Annualised 5-yr performance 12-month Yield Ongoing charge   Morningstar rating 
Stewart Investors Global Emerging Markets Sustainability B (Acc) EUR 330.8 11.8% 1.16% 1.03% *****
Newton Global Emerging Markets Institutional W Net (Acc) 75.8 11.0% 0.44% 0.95% *****
Polunin Developing Countries A 284.9 10.4% n/a 1.96% *****
Fidelity FAST Emerging Markets Y (Acc) GBP 1,476.2 10.3% n/a 1.30% *****
Stewart Investors Global Emerging Markets Leaders B (Acc) GBP 2,701.6 9.7% 1.23% 0.92% *****

Source: Morningstar, for the Global Emerging Markets Equity category. Where more than one class of fund features only the best performer is listed.

Best performing Global Emerging Market investment companies over the last five years

Investment company Market cap £m Annualised 5-yr performance *  Dividend Yield Ongoing charges **  Discount to NAV Gearing Morningstar rating
BlackRock Frontiers 214.5 16.5% 3.9% 1.60% -0.7% 3% ****
Aberdeen Frontiers 108.0 10.5% 1.5% 1.71% -5.2% 0% **
Utilico Emerging Markets 413.7 8.3% 3.4% 1.08% -11.1% 20% *****
JP Morgan Global Emerging Markets Income 336.1 6.7% 4.3% 1.35% -3.1% 7% ****
JP Morgan Global Emerging Markets   727.3 6.6% 1.4% 1.18% -14.0% 0% *****

Source: Morningstar, The Association of Investment Companies, for the Global Emerging Markets category
*Share price ** Includes performance fee

Best performing US Large-Cap Blend Equity ETFs over the past five years

ETF Market cap £m Annualised 5-yr performance Dividend yield Fund Ongoing Charge Morningstar rating  Replication method
SPDR MSCI Emerging Markets UCITS ETF GBP 109.6 5.71% n/a 0.42% *** Physical
Amundi ETF MSCI Emerging Markets UCITS ETF USD 2,444.7 5.64% n/a 0.20% *** Synthetic
HSBC MSCI Emerging Markets ETF 210.9 5.57% 1.79% 0.40% *** Physical
iShares MSCI Emerging Markers UCITS ETF (Acc) USD 409.6 5.49% n/a 0.68% *** Physical
db x-trackers MSCI Emerging Markets Index UCITS ETF 1C USD  1,325.7 5.40% n/a 0.65% *** Synthetic

Source: Morningstar, for US Large-Cap Blend Equity category. Where more than one class of fund features only the best performer is listed.

Read more from our world investment outlook 2017 series:

World investment outlook 2017: UK

World investment outlook 2017: USA

World investment outlook 2017: Japan

World investment outlook 2017: Europe


russmould's picture
Written by:
Russ Mould

Russ Mould has 28 years' experience of the capital markets. He started at Scottish Equitable in 1991 as a fund manager and in 1993 he joined SG Warburg, now part of UBS investment bank, where he worked as equity analyst covering the technology sector for 12 years. Russ joined Shares in November 2005 as technology correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media by AJ Bell Group, he was appointed AJ Bell’s Investment Director in summer 2013.