Emerging market (EM) stocks have been under pressure. The MSCI EM has dropped 1.9% this week—versus a gain of 0.7% for the S&P 500—and the J.P. Morgan Emerging Market Currency Index has fallen in 8 out of the last 10 sessions.

But we see a number of reasons why EM underperformance should not persist:

* We expect economic growth to pick up. The aggregate EM manufacturing PMI improved to 50.9 from 50.5 in the last month, mainly due to better data in China and Russia. China is a significant global manufacturer, but is a link in the chain, rarely making a product from start to finish. Stronger Chinese industrial production signals stronger production for other countries along the supply chain. In turn, better economic activity could boost corporate earnings, which we expect to grow by 7% on a 12-month horizon.

* EM equities are attractively valued. EM stocks currently trade at 13.2x 12-month trailing EPS, a 17% discount to the 30-year average.

* The Federal Reserve’s pause in monetary policy tightening has allowed central banks globally to take a more dovish policy stance, which will help keep funding costs low in EM. US dollar strength is a headwind for EM, but we expect the dollar to depreciate over a 6-12 month time horizon.In our base case, we are looking for global economic growth to stabilize around its long-term trend, the oil price to remain strong, and the China-US trade conflict to avoid further escalation. Against such a backdrop, EM stocks should outperform given their cyclical exposure, and we remain overweight.