After several years of underperformance relative to developed markets, emerging market (EM) equities experienced a year of outperformance in 2016. This positive trend has continued and investors appear to be viewing EM equities’ woes as yesterday’s news.

Early Stages of a Recovery in Emerging Markets

In 2016, we saw EM economies bottoming, reductions in balance of payments risk, broad strengthening of EM currencies, rebalancing of Chinese growth and the stabilization of commodity prices. Further, 70% of the world’s GDP growth is expected to come from emerging market countries in the next five years,1 and demographic and urbanization trends are helping to drive consumption and growth.

We believe that we are in the early stages of an EM recovery, and that strengthening fundamentals for EM stocks are creating an attractive long-term opportunity for investors. In particular, we favor areas of the market including healthcare, education, leisure, and e-commerce and technology.

A Compelling Case for Active Management

Investing in emerging market equities offers one of the most compelling examples of the value of active management. We believe the benchmarks and passively managed emerging market equity funds misalign investors with the growth of the asset class and are backward rather than forward looking. Active managers have the flexibility to focus on sectors that are benefitting from structural growth trends and can also employ risk management techniques that aren’t available to passive portfolios. We believe that an active, long-term approach that favors high-quality businesses is the optimal way to capture the EM growth opportunity.

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1Source: IMF, as of 12/31/16. 2016-2021 numbers are estimates and there is no guarantee that these estimates will be achieved.