Mark Mobius: This is how to play emerging markets in 2017

Emerging markets have been hit by hefty outflows as the U.S. dollar surged in the wake of Donald Trump's surprise election win and the U.S. Federal Reserve's move to hike interest rates for only the second time in a decade.

But in the blog post, co-written by Stephen Dover, chief investment officer at Templeton Emerging Markets Group and Franklin Local Asset Management, Mobius pointed to sectors that may benefit from faster economic growth in emerging markets.

"Companies in the consumer-related and information technology (IT) sectors are particularly attractive," Mobius and Dover said in the post issued on Tuesday.

They added that some consumer-sector stocks offer effective exposure not just to emerging-market economic growth, but also to the burgeoning consumer class's spending growth.

Additionally, the two were positive on emerging market information technology plays.

"Although we are cautious of the recent rapid share-price advances in many of the China-based Internet stocks, we see value in the sector across emerging markets as a whole," they said.

Select commodity shares were also attractively valued, despite the recent rally in oil prices, they added.

The two also said they liked Asia's small-capitalization stocks for exposure to regional economic growth.

"This is helped by small-cap companies' generally greater domestic focus than their larger peers, binding them less to challenging macroeconomic factors at a global level," they said. "Their valuations typically reflect the stronger growth expected from the smaller equities, but, given there are thousands of small-cap stocks in Asia, the opportunities to discover mispriced securities are often plentiful."

But Dover and Mobius were concerned about some sectors on the mainland.

"We remain cautious of China's banks as non-performing loan recognition dampens our outlook for the country's financial firms," they said. "Like banks, China's real estate sector has staged a striking turnaround from a lengthy downturn, but we have remained on the sidelines, in part due to risks of overleverage and regulation."

But while the pair pointed to better valuations in emerging markets, with the MSCI Emerging Markets Index trading at a "significant discount" to the MSCI World Index on a price-to-earnings basis, they noted that risks to the segment were rising.

For one, there are concerns about the Fed, they noted.

At its meeting earlier this month, the Fed increased interest rates for only the second time in a decade, hiking by 25 basis points to a target range of 0.5 to 0.75 percent. That hike was well-expected by the market, but the Federal Open Market Committee (FOMC) surprised by sending smoke signals indicating that they now expect to hike rates three times in 2017, up from a previous forecast for two hikes.

"We expect the trajectory of any rate increases to be gradual, although larger- or faster-than-expected US interest-rate moves could dampen sentiment and lead to volatility," Dover and Mobius said.

They also pointed to other risks, including geopolitical troubles globally, currency fluctuations from Brexit and commodity prices.

"Recent political events in the United States may also test markets," they added. "The U.S. presidential election victory for Donald Trump is likely to have many implications for markets around the world, including emerging markets, and may well add to volatility in equities."

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

See

Calvin Tan Research already saw ahead that Trump might impose tariff on Emerging Markets.

So the defensive buys will be EM Internally generated demand like

1) Commodity stocks. (Eg. are oil, oil palm & steel stocks).

2) Rise of Digital ECommerce (Consumer related)

3) Information technology. Pm Najib has declared that year 2017 will be Internet digital year.

2 stood out are

i) DRB as it is into Consumer ECommerce big time.

And today BANK MAUMALAT also going digital big time

See http://www.theedgemarkets.com/my/article/bank-muamalat-no-ipo-plans-now-digitisation-focus

ii) OPCOM. Lots of fiber optic cables will be needed for maximum hsbb penetration.