To think that emerging markets would have had the run they did in 2016, following the dismal start to the year, and come out of it more than unscathed, is no mean feat.

Let's face it. 2016 was a challenging year for emerging markets, and it could have been far more challenging were it not for the sharp recovery following the weakness seen towards the end of 2015 and beginning of 2015, as pockets of value began to emerge, and EM flourished for the major part of the year, being better bid for the subsequent months thereafter.

The notion that the 30-year long bond rally could be drawing to a close coupled with the gradual change in tone and monetary policy style as adopted by the US Federal Reserve through higher interest rates, kept the dollar supported against major emerging market currencies.

This coupled with the Trumponomics factor in the markets did little to dampen the upbeat mode on emerging markets on the whole, shrugging off most of the obstacles it faced and in the process recording one of the most impressive years in recent history.

In December, Fed Chairperson Yellen raised interest rates by 25 basis points, indicating that in 2017 there could be yet another three rate hikes should positive economic conditions persist and warrant such as move.

This unsurprisingly had an adverse effect on Emerging Markets but nevertheless ended the year with an upbeat momentum. Having said that, 2016 will be undoubtedly hard to match so we must all remain with our feet held tightly to the ground in 2017 and embrace ourselves for an era of possible higher interest rates in the US.

In view of this, all eyes will inevitably be on the US dollar (and how it impacts other key emerging market currencies) this year and how monetary policy in the US pans out. In the former’s case the dollar will be now more conditioned by the implementation of Trump’s policies, while to a certain extent most of the latter is already being priced by the market.

We acknowledge that the outlook for growth in emerging markets is expected to remain robust, with growth to come from countries such as Brazil and Russia (following periods of subdued if not negative economic growth). PMIs are also maintaining their positive traction whilst the stability in the price of oil and commodity prices is expected to translate in improved external growth.

However, we remain cautious that newly president elect Donald Trump’s policies could act as a deterrent on emerging market growth, as a stronger dollar (in the wake of possible higher inflationary pressures in the US) could adversely impact credit and financing conditions within the emerging markets space and possibly also results in capital outflows from the region.

We will also be closely monitoring ties between Trump and Mexico as they have clearly been dented following Trump’s victory last November.

China’s economic slowdown has been seemingly put on the backburner for most of 2016 as the market focused on other key major ongoing themes, but the health of the Chinese economy is also expected to dictate sentiment within this asset class.

To top it all up, there are the geo-political tensions which markets and economies need to deal with. From tensions in the Turkey-Syria region showing no signs of abating, to Russia seemingly intent on re-igniting ties with the US (which could be a positive) to other external factors such as ongoing Brexit negotiations and some key elections within the Eurozone during 2017 which are sure to play some role in some form of another albeit to a lesser extent on emerging markets.

Opportunities are sure to arise throughout 2017 and we will be cautiously and selectively seeking to take advantage of market opportunities if and when market conditions permit. What is sure is that emerging market niche opportunities will persist and investors will still find ways to grab attractive yields from the said niche opportunities.

This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.