By Eric Anderson, Managing Partner & Head of Investment Solutions, Milltrust International.

Markets are driven by greed and fear and in 2015, fear was certainly prevalent. To help put this in perspective, there have been more outflows from Emerging Markets in the third quarter this year than during the height of the Global Financial Crisis in 2008. Emerging Markets currencies are close to their 15 to 20 year lows and equity valuations are trading near a 30% discount to global numbers (MSCI EM Index to MSCI World Index). We have also seen more Emerging Markets funds close down this year than launch; this hasn’t happened since the early 2000’s.  So, what’s next for the EM equities asset class?

In last quarter’s report, I shared my thoughts as to how investors should increase their exposure to Emerging Markets by being selective on both the country and stock levels. Since then, we have also seen some of the world’s most influential investors also declare themselves selectively bullish in Emerging Markets, particularly when it comes to China, the region’s largest economy. Warren Buffett, who famously said ‘be greedy when others are fearful’, has declared himself a China bull; Hugh Hendry, known as a perma-bear, has become much more constructive on China, and even Howard Marks, the godfather of distressed debt investing, describes China as an unruly teenager with the best years ahead.

From a global macro perspective, the focus in 2016 remains on how the individual Emerging Markets countries responds to the challenges presented by the fed tightening and the deflation being exported from China. Those countries likely to have more success will be those who are in a position to implement counter-cyclical measures in the short term, such as China, India, Mexico and Indonesia, amongst a handful of others. Meanwhile, other countries, like Brazil and South Africa, will continue to struggle with deeper structural issues that require either political or economic reform.

Overall, we expect 2016 to provide a much more conducive environment to investing in risky assets (such as Emerging Markets equities) primarily due to the effects of the strong dollar and decline in commodity prices gradually fading, headline inflation steadily rebounding, and global growth momentum slowly improving.