Emerging markets (EM) are no longer the new kids on the investor block and are showing signs of "maturing", according to Citi's top global political analyst.
In Citi's latest report on global strategy, Tina Fordham focused on the prospects for emerging markets.
"Emerging markets did well in 2017 and the backdrop continues to look favorable going into 2018," she said.
While there were challenges for EM to overcome, and "it would be wrong to expect unhindered growth," there was nonetheless a "a growing resilience to shocks (that) suggests that EM is maturing as an asset class," Fordham said.
Emerging markets stand in contrast to advanced, established markets (usually called developed markets, or DM) such as the U.S. and Europe, although which countries are classed as emerging markets differs between financial institutions.
EM became popular with investors during the age of quantitative easing (QE) programs started in 2008 and 2009 by central banks in the U.S., U.K. and euro zone with investors searching for higher returns amid a low interest rate environment. A number of economies in Central and Eastern Europe, Middle East and Africa, Asia and Latin America tend to be classed as emerging markets.
Despite major economies now winding down their QE programs, which were a large factor behind the investor flight to EM, Fordham and her colleagues at Citi said that emerging markets were showing signs of resilience and maturity and were worthy of "serious attention."
"Emerging market outperformance has been an enduring theme for us recently and this looks set to continue into 2018. With more attractive expected returns than developed markets and a seemingly improved ability to endure shocks, there is an argument to be made that EM has 'grown up' as an asset class and merits more attention from asset allocators," their report said.
Citi called 2017 a "Goldilocks" year for EM, in which "growth accelerated but in no sense overheated; and capital inflows increased but not excessively."
Fordham said that the factors that drove inflows to EM in 2017 were still in place, including the fact that EM currencies are "not overvalued, real rates remain relatively high, current accounts remain strong and reserves are robust."
She also expected "a modestly weaker U.S. dollar in 2018 which should also help support emerging market in-flow."