While trade risk continues to plague global economies, India and China are expected to be major emerging market growth drivers, according to State Street Global Advisors’ mid-year global outlook report.

If trade relations between the the U.S. and China improve, it could lead to a recovery in emerging markets overall, the report said.

Both sides are under pressure to come to a resolution, the report noted, with China contending with significant levels of corporate debt and the Trump administration seeking to avoid recession at home in the lead up to an election.

While trade tensions are currently weighing on growth, the change in the Federal Reserve’s policy stance and fiscal stimulus in China are creating conditions for better growth in emerging markets nearing the end of the year, the report said.

This all comes at a time when many of the growth opportunities for the next decade are in both the Chinese and Indian markets, the report noted.

China is the largest economy on a purchasing power parity basis and the International Monetary Fund expects China’s growth to make up 34 per cent of the expected 3.3 per cent global growth in gross domestic product for 2019, the report said. While China’s growth for 2020 is expected to fall to 6.1 per cent, this still puts it above expected emerging market overall growth of 4.8 per cent.

India’s growth projections are even higher, at 7.5 per cent for 2020, on the rise from 7.3 per cent in 2019.

It could take time for the growth in India and China to translate into investment returns, it added.

“The rally so far this year has been driven, as elsewhere, more by multiples than by earnings, and remains exposed to trade conflict,” the report said. “Consensus forecasts for earnings-per-share growth have been revised down from 8.9 per cent at the end of 2018 for the MSCI EM Index to 6.7 per cent for 2019, although current expectations have moved higher from a February 2019 low of 5.8 per cent.”

Index weightings are impacting investor positions in these two countries, the report noted. Going forward, India will likely see outflows as more shares of Chinese companies are included.”Therefore, investors looking for greater exposure to a faster-growing India may wish to take an active stance on EM equity to increase their weighting and benefit from variations in returns across different EMs,” the report said.

Notably, within emerging markets the information technology sector is the main driver of lower earning estimates. Yet, dampened earnings could spell opportunity in these markets as the larger tech names maintain their attractive growth potential, alongside the rise in disposable incomes and domestic consumption in those countries, the report said.

“Risks remain for EMs, not least the threat of rising protectionism from [developed markets] such as the US,” the report said. “However, we believe that the growth story in the two largest countries – India and China – continues to offer opportunities for investors in both the equity and debt space. Within an EM allocation, therefore, it is worth considering how best to gain exposure to these larger economies.”