After a strong summer, AJ Bell’s head of investments, Ryan Hughes, says emerging markets have now significantly outperformed broad global equities in 2017. The standout driver for this, he says, has been the performance of China, while India has also been a good performer.
“Looking at China, the major driver of this performance has been technology related stocks, which have risen sharply on the back of the global technology rally,” says Hughes.
“The four largest stocks on the MSCI Emerging Markets Index are now technology stocks, with Tencent being the largest at nearly 5%.
“Helpfully, this stock has doubled in 2017, providing a major tailwind to the index. In addition, the technology sector is the largest, making up nearly 27% of the index, up from 10% some 10 years ago.
“With the election of Donald Trump widely seen as negative for emerging markets, the end of 2016 was a tough period for the region. However, as investors have digested the Trump presidency and global growth has remained resilient, investors have looked to reallocate to the region.
“With free floats significantly lower in emerging markets compared with developed markets, it has taken less capital than many would expect to drive markets higher.
“While stocks such as Tencent are now looking more expensive, more broadly, despite the rally this year, valuations of emerging markets remain below developed markets on a P/E basis and attractive on a price to book basis. Should global growth remain acceptable, it is entirely reasonable to build a case that this rally has further to go.”