While prospects at the start of 2016 seemed rather dour for emerging markets, resilience has been the story in the asset class for the first half of the year. But what’s behind the improvement in emerging market equities?

Year-to-date, emerging market equities have outperformed developed markets in US dollar terms, with the MSCI Emerging Markets Index up 14.5 per cent, while the MSCI World Index is up 2.7 per cent. Growth rates in emerging markets also continue to outpace those of developed markets; the International Monetary Fund estimates gross domestic product growth of 1.8 per cent in 2016 and 2017 for advanced economies, and growth of 4.1 per cent and 4.6 per cent, respectively, in emerging/developing economies.

In August, Moody’s ratings agency revised its outlook on the world’s largest emerging market economies upward for 2016 and 2017, with the expectation that these economies have stabilised. While the year is not yet over, we see brighter prospects for investors in emerging markets compared with last year, and the long-term performance of emerging market equities compares favourably to that of developed markets.

The asset class received strong inflows this summer as investors continued to search for higher yields, helping to drive outperformance. A rebound in commodity prices this year — led by oil — has further shifted investor sentiment in favour of emerging market equities.

At the same time, many emerging market countries have moved to lessen their dependence on commodities as drivers of growth and diversified their economies into areas including information technology and other service-based sectors.

The dollar has stabilised, and this has largely benefited emerging markets as it reduces the threat of a dollar-denominated debt. Many companies in emerging markets have issued debt in dollars, making it harder to repay when their economies are weak at the same time the dollar is strong.

In addition, global economic challenges including the UK’s referendum vote to leave the European Union, several major central banks have taken a dovish stance on interest rates, which we think bodes positively for emerging markets’ growth and assets. At the same time, the US Federal Reserve has been very cautious in terms of tightening this year.

We think emerging markets should be able to weather gradual increases in US interest rates, which seems to be the path Fed policymakers have indicated.

In addition, many emerging market countries are making progress on structural reforms to stimulate growth. For example, India recently passed a national bankruptcy law, and a goods-and-services tax bill, and has relaxed foreign direct investment rules to stimulate economic growth.

Perhaps the biggest catalyst of investor sentiment has been China. In 2015, events in China were a driver of a substantial sell-off that affected all emerging markets.

Weak economic data added to the uncertain market mood, causing the Shanghai Composite Index to decline approximately 40 per cent from its peak in mid-June of 2015. While China’s market has recovered a bit since then, the economy still has many ailments, including an oversupply of housing, excess capacity in many industries, a slowing manufacturing sector and considerable debt issues.

However, there are also many strengths fostered by China’s economic rebalancing, including growth in consumption driven by rising wages, an expanding services sector and new infrastructure initiatives launched by the central government.

So, perhaps more importantly, signs of stability in China’s economy have been a key factor in boosting overall sentiment in emerging markets this year. Recently, Chinese authorities have taken a step forward in opening up domestic equity markets with the long-awaited approval of Shenzhen-Hong Kong Connect, which allows trading between mainland domestic shares (A shares) and the market in Hong Kong (H shares).

In our view, the fundamentals in China still look very good. The country remains one of the fastest-growing economies in the world despite a decelerated growth rate from decades past, and we remain confident in the government’s efforts to effect a broad economic rebalancing away from an export-driven model and toward one that is more domestic-oriented.

Elsewhere, Latin American equities have seen positive performances overall this year. Sentiment improved amid sweeping political changes and reform efforts in Brazil, culminating with the formal impeachment of former President Dilma Rousseff in August. Peru’s market has also benefited from business-friendly Pedro Pablo Kuczynski’s victory in the recent presidential election. In Argentina, a new government eliminated most capital controls and reached a deal with creditors.

These are just a few factors behind the resilience we have seen in emerging markets this year. We also see many positive long-term trends continuing, including favourable demographics and a rise in purchasing power and consumption in many of emerging economies — and the story is far from over.

As such, we believe the long-term investment case for emerging markets remains positive. Economic growth rates in emerging market countries are likely to continue to outpace those of many developed-market economies. While emerging markets remain sensitive to macroeconomic indicators and global monetary policy — meaning volatility is likely to persist — equity markets appear to have begun to readjust.

We see signs confidence is returning to emerging markets and believe it is likely to continue.

The writer is Executive Chairman at Templeton Emerging Markets Group.