Sentiment about emerging markets is prone to big swings. From the late 1990s optimism, bordering on euphoria, was the order of the day. That bubble burst more than five years ago. Since then, but with some conspicuous exceptions, sentiment about emerging markets has become increasingly negative.
China's long-term slowdown, widespread political turmoil, falling commodity prices, and the withdrawal of capital by foreign investors have all played a role. Emerging market equities have taken a hammering and growth has softened.
At the start of this year sentiment hit a new low. The risk of a hard landing for emerging economies, especially China, was widely seen as the biggest danger to the global economy.
Those fears have not been realised. Indeed, while the world has been pre-occupied by Brexit, the US Presidential Elections and the failed Turkish coup, things have started to look up for emerging markets.
Most strikingly investors have turned more positive. Capital flows into emerging markets have risen sharply. In the last six months emerging market equities have risen by almost 25%. Investor demand for the debt of emerging market companies, one of the riskiest of assets, has soared.
What lies behind this change in sentiment?
The pessimistic interpretation is that emerging markets are the beneficiaries of weak growth and ultra-low interest rates in the West. Brexit, by fuelling uncertainty and pushing interest rates lower has added fuel to the fire. Investors have responded by pulling capital out of the Western markets and putting it into emerging economies where interest rates, growth and returns are higher.
More positive factors are also at work.
Firmer commodity prices, often seen as a harbinger of stronger global growth, have helped emerging market producers. Oil has led the charge, with the price of Brent crude up 34% between the first and second quarters of this year, and metals, timber and many other commodity prices have firmed.
Emerging market growth is hardly stellar. China is likely to grow at its slowest rate in 25 years this year, Brazil is in the midst of its worst recession since the 1930s and the Russian economy is contracting. But the downward trend for emerging market activity as a whole seems to have run its course. Growth is widely expected to accelerate in 2017. India is forecast to grow by 7.6% next year, the fastest rate of growth among any major economy. Brazil and Russia are likely emerge from recession. Chinese growth is expected to ease, but, at a forecast 6.2% in 2017, would still be far higher than global averages. Crucially, the risk of a Chinese 'hard landing' have eased.
New pockets of fast growth are also emerging. Last week The Economist noted that Vietnam has recorded the world's second-fastest growth rate per person since 1990, behind only China. Boosted by supply-side government reforms, a large and young population and proximity to China, Vietnam seems to be on a rapid growth path. Other emerging economies, including Kenya, Ethiopia, the Philippines and Mexico should also maintain their strong performance.
For the last five years the health of emerging economies has been a growing pre-occupation for global policy makers. The risks have certainly not been eliminated, but they have eased. That is good news in a world where emerging markets account for almost 60% of global output.
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