Perhaps the most promising trend favouring investment in developing economies has been the widespread implementation of reform programmes to boost growth and productivity. Entrenched local interests may resist individual measures, but there is a broad political impetus in this direction across many different countries. Of course this encouraging picture would be endangered if there was a sharp deterioration in international relations, particularly in the event of military conflict on the Korean peninsula.
Meanwhile strong global growth also provides a favourable background, and many emerging economies are growing more quickly than their developed counterparts. This has been reinforced by interest rate cuts from a number of the central banks, notably India and Brazil, and Mexico may start to cut rates soon. Lower borrowing costs for companies should further stimulate investment spending and consumption.
Prospects for China seem positive following the conclusion of the Communist Party's National Congress. Premier Xi's power over the party looks secure. Debt levels remain high, but the People's Bank of China gradually raised interest rates over the last six months, and is trying to move lending away from the shadow banking system into better regulated channels. The country's reliance on exports is slowly being reduced, as the importance of consumption to the overall economy increases. This shift is likely to continue which bodes well for China's regional trading partners in South East Asia.
In India, President Modi has introduced major tax reforms. The country has a low level of tax take, and increased revenues from taxation would allow government spending to be increased, enabling large numbers of people to be lifted out of extreme poverty and brought into regular employment. If this strategy proves successful, it will significantly enhance the economy's long-term prospects. Companies focused on consumer spending should benefit disproportionately.
Brazilian President Temer's government has started to push through some important legislation. The Senate has passed a labour reform bill and a wide-reaching privatisation plan has been announced. Even more ambitious and controversial plans to reform pensions and the tax system have also been proposed. In the shorter term, Brazil's worst recession in its history appears to have ended. Companies have cut costs and, despite the weak growth, corporate profitability is improving rapidly which should in turn foster a pick-up in business investment.
In summary, the economic backdrop for investment in emerging markets is positive with good growth in their export markets and even faster expansion at home. While the political will for structural reform is variable, significant progress has been made in several countries. This is an environment in which long-term investors with a selective approach should prosper.