2017 Outlook:
Navigating a World in Transition

Emerging Markets

Re-emerging

A New Economy Emerges in Emerging Markets
Sources: MSCI, RIMES as of 12/31/16. List represents the 10 largest companies by market capitalization in the MSCI Emerging Markets Index as of 12/31/96, 12/31/06, 12/31/16.

Times have changed in emerging markets. Materials and energy companies used to be key components of developing markets, but the focus has shifted to technology and consumer companies such as internet powerhouses Tencent and Alibaba. More recently, emerging markets are bouncing back after a tough stretch the past few years. Currencies have strengthened, commodity prices have stabilized and some structural reforms are taking root. Investors should take advantage of attractive emerging market valuations, but be prepared for volatility in 2017.

China's "Long Landing" Should Continue for Years
Source: Thomson Reuters Datastream.

The slowdown in China's economic growth injected volatility into global markets in 2016, but a "long landing" seems more likely than a hard landing. The transition from an investment-led to a consumer-led economy has been underway for two decades, and in 2015 services represented the majority of China's economy for the first time. In addition to a growing middle class, China's economy is also supported by aggressive stimulus and a healthier property market.

Indian Consumers Come to Life
Households That Own Durable Goods (%), as of 2015
Source: Euromonitor International. Data are based on possession rate, which is a measure of how many of the population units used (e.g., households) own at least one unit of a certain product, as defined by Euromonitor.

India is a bright spot in emerging markets. But when it comes to being an economic powerhouse, India may just be getting started. The country still lags much of the world in owning items such as refrigerators and air conditioners, but modernization is progressing at a relatively rapid rate so global appliance companies such as Bosch and Whirlpool should benefit. Additionally, a swelling workforce makes it likely India will continue to be a massive market for consumer companies around the world.

Emerging markets appear to have turned the corner after several challenging years. Two areas that I find interesting are the banks, which have the potential to do well as economic growth improves, and the commodities sector, where prices have bottomed and companies have made progress on restructuring their balance sheets.

Mark Denning, Portfolio Manager

Disclosure

* Income from municipal bonds may be subject to state or local income taxes and/or the federal alternative minimum tax. Certain other income, as well as capital gain distributions, may be taxable. Methodology for calculation of taxable-equivalent yield: Based on 2015 federal tax rates. For the year 2016, there will be an Unearned Income Medicare Contribution Tax of 3.8% that applies to net investment income for taxpayers whose modified adjusted gross income exceeds $200,000 (for single filers) and $250,000 (for married filing jointly). Thus taxpayers in the highest tax bracket will face a combined 43.4% marginal tax rate on their investment income. The federal rates do not include an adjustment for the loss of personal exemptions and the phase-out of itemized deductions that are applicable to certain taxable income levels. Index proxies for below-investment-grade and investment-grade munis are Bloomberg Barclays Municipal High Yield Index and Bloomberg Barclays Municipal Bond Index, respectively; U.S. taxable bonds represented by Bloomberg Barclays U.S. Aggregate Index. The indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in indexes.

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