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Investing

Our top trade idea for 2021? Emerging market equities.

This investment opportunity has the potential to produce above-market returns as the economy heals.


At any market juncture, we keep an eye out for the investment opportunities that might deliver above-market returns. As the new year gets underway and the economy continues to heal, we’re leaning into our top trade idea from our 2021 Outlook: Embrace the global recovery by investing in emerging market (EM) equities.

The global recovery is already gaining traction. We expect solid global growth over the next few quarters, and we think Asia may lead the way. Asian countries have done a generally good job in responding to the pandemic, and global demand for technology products has sparked a strong rebound in manufacturing and trade in the region. That’s good news for equity investors. China, Taiwan and Korea make up almost two-thirds of the Emerging Markets Equity Index.1

Indeed, technology is a big part of the EM story. Today, the technology sector accounts for almost 20% of the EM Equity Index, up from just 10% in 2007,2 when the commodities sector (energy and materials) represented nearly a third of the index. This offers valuable exposure to the megatrend of digital transformation. For example, the global leader in manufacturing semiconductors—which are becoming one of the world’s most important resources—is based in Taiwan, and financial technology adoption is high in China and India. As the index continues to shift away from volatile commodity revenue streams, investors could be willing to pay higher valuations for more stable tech company earnings.

Yet here it’s worth noting that, as recent media buzz suggests, regulatory concerns for Chinese technology giants could remain a near-term overhang. Yet, markets seem to have taken this into account. While uncertainty persists and much more clarity is still needed, we are of the view that the regulators do not intend to break up platforms, and any penalty should be manageable. This could turn out to be a notable buying opportunity for patient investors.

Looking beyond the Asia and technology sector components of EM equities, much of the rest of the index has been hard hit by the virus—and their stock prices have taken a hit. They could benefit greatly if the vaccine rollout moves more quickly and seamlessly than expected. Russian and Brazilian equities, for example, rallied by over 3.5% in the two days around Pfizer’s announcement that its vaccine candidate was 90% effective.

Turning to U.S. politics, the Biden administration is likely to take a more predictable approach to foreign policy than its predecessor. That should encourage more trade and investment, and, in our view, more downward pressure on the dollar. A weaker dollar is a significant boon to EM assets. Indeed, in the days after the election, the U.S. dollar weakened materially against Asian currencies, and inflows into EM Asia ex-China equities hit their highest levels since before the trade war started.

Of course, EM equities are not for every portfolio or investor. You should consider an investment in the space in the context of your own goals. Volatility should be expected, and sell-offs can be sudden. Still, we do think EM equities are especially well positioned to harness the power of a healing global economy.3

As always, we suggest you have a full conversation with your J.P. Morgan team. And for more in-depth, actionable insights into the forces likely to shape the global recovery and your portfolios in the coming year, please see our 2021 Outlook.

1.The MSCI Emerging Markets Index stands for Morgan Stanley Capital International (MSCI), and is an index used to measure equity market performance in global emerging markets.
2.FactSet, MSCI. January 2021.
3.Emerging markets carry higher risks for investors who should therefore ensure that, before investing, they understand the risks involved and are satisfied that such investment is suitable. Investors must understand that transactions involving emerging markets currencies bear substantial risks of loss.

 

 

 

 

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This material is for informational purposes only, and may inform you of certain products and services offered by
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  • The MSCI China Index captures large- and mid-cap representation across China H shares, B shares, Red chips, P chips and foreign listings (e.g., ADRs). With 459 constituents, the index covers about 85% of this China equity universe. Currently, the index also includes Large Cap A shares represented at 5% of their free float adjusted market capitalization.
  • The Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.
  • The STOXX Europe 600 Index tracks 600 publicly traded companies based in one of 18 EU countries. The index includes small-cap, medium-cap and large-cap companies. The countries represented in the index are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Holland, Iceland, Ireland, Italy, Luxembourg, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

This material is for informational purposes only, and may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). Please read all Important Information.



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