Perhaps the most promising trend favouring investment in developing economies has been the widespread implementation of reform programmes to boost growth and productivity. In the short term entrenched local interests may resist individual measures, but there is a broad political impetus in this direction across many different countries. This is a key factor in ensuring that economic growth remains superior to that elsewhere.
However, the immediate outlook for emerging markets is more difficult. Rising interest rates across the globe look set to impact investment spending and consumption. A higher oil price is hurting large net importers, including China and India. In the past developing markets have proved vulnerable to rises in the US dollar, and the recent strength of the currency has contributed to the negative sentiment evident this year.
Political factors have compounded these economic headwinds. President Trump's 'America First' policy is likely to prove very damaging to global commerce, and prospect of a trade war between China and the USA is an alarming one for investors, particularly as the Chinese economy is already slowing. Turkey is facing a full-blown political crisis as the re-elected President Erdogan battles US trade sanctions and attempts to face down international markets by refusing to raise interest rates to defend a plummeting currency. The election of a populist president in Mexico may lead to a testing period for the country which has to accommodate high expectations for change at the same time as stabilising the NAFTA agreement with the USA. All of these issues have the potential to ripple beyond local borders and provoke international selling of investments in developing markets.
Nevertheless, global growth is still strong, offsetting these short-term difficulties, and emerging economies should continue to benefit from this positive background. Looking beyond the present volatility, developing markets have better growth prospects than their developed counterparts. Long-term investors should be well rewarded with a selective approach.