Non-resident emerging market portfolio inflows last year were the weakest since the financial crisis but fund managers remain optimistic for performance in 2017.

The Institute of International Finance, the trade group of financial institutions, said in a report that non-resident portfolio outflows from emerging markets are estimated to have been $3.4bn (€3.3bn) last month. Non-resident portfolio flows measured by the IIF are a subsection of overall net capital flows, which include all types of flows from both residents and non-residents, covering portfolio flows, banking flows, direct investment and other components of the financial account.

“December’s dismal reading cuts total net non-resident emerging market portfolio inflows for 2016 to just $28bn – the weakest year since 2008 and 90% below the 2010-14 average,” added the IIF. “Overall, emerging market equities did better in 2016, with $61.4 bn in net portfolio inflows; emerging market debt saw net portfolio outflows of $33.8bn for the year.”

The IIF continued that a number of factors led to the retrenchment in portfolio flows to emerging markets including rising US yields,  idiosyncratic events in a number of countries, including Turkey and  India, concerns about the path of the Chinese renminbi and the potential impact of the incoming US administration.

Jan Dehn, head of research at emerging markets specialists Ashmore Investment Management, said in a note this week that emerging market fixed income dramatically outperformed US fixed income last year based on the conventional market benchmark indices. Local currency government bonds in emerging markets returned 9.94% in dollar-terms in 2016, while US five-year and 10-year bond returns were 1.33% and 1.04%, respectively.

Dehn expects emerging markets to continue to outperform this year as draconian trade wars, rate hikes from the Federal Reserve and very strong US earnings growth are unlikely to materialise to the expected extent.

“Given this excellent entry point the outlook for EM fixed income in 2017 is one of the brightest in several years,” Dehn added. “We particularly like the outlook for much maligned EM local currency bonds, although high beta credits in sovereign space should also do well. Corporates should deliver decent returns on the back of falling default rates.”

Dehn argued that the biggest risks to emerging markets come from developed economies, where political, economic and financial constraints slowly become more pressing.

Ashmore is cautiously optimistic about emerging market equities due to better macroeconomic drivers and very compelling valuations. “Our slight hesitation with respect to equities reflects the potential for negative beta effects emanating from political risks in developed economies,” said Dehn.

At Pimco, Joachim Fels, global economic advisor and Andrew Balls, chief investment officer of global fixed income, said in a report that they expect to cautiously increase emerging risk in their portfolios as substantial uncertainty is balanced by attractive valuations and Trump-related bad news has already been priced in.

“We will focus primarily on high carry and commodity-related EM currencies to add carry to portfolios and utilize the most liquid vehicles for EM risk,” added Pimco. “Against that we plan to be underweight EM Asian currencies, given our expectation for ongoing China depreciation, low carry and the potential for monetary policy easing in that region to support weak domestic demand. Low inflation in the region would support the case for easing as well.”

Morgan Harting, lead portfolio manager for multi-asset income strategies at AllianceBernstein, said in a blog that while there are concerns, the geopolitical order is shifting towards emerging powers who are becoming less reliant on external sources to generate growth and provide emergency support.

“Improving economic growth in many developing economies is driven by domestic trends—not by the US,” said Harting. “For example, Russia and Brazil are shifting from recession toward recovery. Accelerating growth in more EM economies can help offset the impact of China’s deceleration, in our view.”

Harting added that some of the most profitable and compelling secular growth technology companies in the world are in China. In addition there are companies with attractively valued stocks including industrial commodities companies in Russia, Korean financial institutions and consumer staples companies in emerging countries with strong brands that command loyalty from an aspiring middle class.

“We think the key to constructing a resilient EM portfolio is to combine equities, debt and currencies, with stringent security selection,” said Harting.