By: Mary Fjelstad, senior research analyst
The equity markets saw a breath of new life in 2017. Market participants showed signs of increased confidence and an enthusiasm for additional risk over the course of the year. One segment of the market that demonstrated this increase in risk appetite was Emerging market equities—experiencing their strongest performance since 2009. A closer look at the drivers of this performance and the way Emerging markets behaved relative to Developed markets can help put their advance in perspective.
In 2017, the FTSE Emerging Index (Emerging Market Index) had a strong return of 32.5% compared to 23.9% for Developed markets as tracked by the FTSE Developed Index (Developed Market Index). The financial markets’ appetite for risk last year emerged particularly within Secondary Emerging markets, with the FTSE Secondary Emerging Index outperforming the FTSE Advanced Emerging Index by close to 7%, with a total return of 35.7% compared to 29.1% for Advanced Emerging markets.
Indeed, the market’s enthusiasm for Emerging markets increased over the course of 2017. As the chart below shows, the Emerging Market Index had a very strong first half but experienced a surge relative to the Developed Market Index mid-year. From a regional perspective, Emerging markets in the Asia-Pacific region performed best with a 37.5% return with Latin America and Emerging Europe at 23% and 21%, respectively.
One factor behind the outperformance of Emerging markets equities compared to Developed was the falling value of the US dollar, which has historically given a leg up to Emerging market economies. In 2017, the dollar declined 6.6% against a broad collection of world currencies. Emerging market economies are sensitive to the US dollar for many reasons, among them the impact of dollar values on commodity prices and the cost of servicing dollar-denominated debt.
Emerging markets equities have also offered increased diversification benefits to global indexes since 2011. This has been exhibited by the reduced correlations Emerging equities have shown relative to Developed equities. Correlation levels reached 0.63 in 2013—their lowest point over the past 15 years—but as of the end of 2017 correlations were still historically low at 0.69.
 FTSE utilizes a variety of characteristics of each country or region and a defined process to determine the quality of countries and markets and to classify them into different levels. For a description of the process, please see: http://www.ftse.com/products/downloads/FTSE_Country_Classification_Paper.pdf. For the report on the 2017 classification review, see: http://www.ftse.com/products/downloads/FTSE-Country-Classification-Update_latest.pdf; for current matrix of variables, please see: http://www.ftse.com/products/downloads/Matrix-of-Markets_latest.pdf
 Source: US Federal Reserve Trade Weighted U.S. Dollar Index: Broad, Index 2016-12-28=100, Weekly, Not Seasonally Adjusted.
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