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Why do we believe 2021 is different for emerging markets?


Markets in a minute

Out with the old, in with the new

This week ushered in a sense of “newness” for investors. For the first time in almost 30 years, the S&P 500, NASDAQ 100 and MSCI Emerging Markets Indices all made new record highs on the same day. The S&P 500’s (+2.3%) and NASDAQ 100’s (+4.7%) gains through Thursday have been mostly driven by strong rallies in the mega-cap FAAMG names. Meanwhile, emerging markets continue to lure investors with their relatively attractive valuations, prospects for a rebound in global growth, and currency tailwinds (more on these forces later).

This week, the 4Q 2020 earnings season got into full swing. Nearly 89% of S&P 500 companies that have reported so far have beaten downtrodden expectations, but we do still expect that aggregate index earnings contracted in the fourth quarter versus one year before. As the stock market rally continues, we believe further upside will be driven mostly by an earnings recovery in the year ahead, however—we’re keeping our ears open for new forward guidance offered on earnings calls to validate our outlook for +25% earnings per share growth in 2021.

And, of course, Joseph R. Biden was sworn in as the President of the United States. The new POTUS got to work quickly: Through Thursday night, he’s already signed 30 executive orders. Biden’s actions so far have touched on a variety of Democrats’ policy concerns (e.g., the environment, immigration, workplace discrimination, etc.), but we would point out that the strongest emphasis is being placed on battling the pandemic and revitalizing the economy.

If there’s a common thread in this week’s highlights, it’s optimism around the recovery. As we discuss in our 2021 Outlook, we think emerging markets could continue to be one of the biggest beneficiaries of the global economic healing process.


A new dawn for emerging markets?

Those betting on emerging markets (EMs) to outperform have often been disappointed. Despite strong growth and supportive demographic and consumer trends, EM equity returns have only averaged +3.6% per year from 2010 to 2019.

But 2020 was different: The MSCI Emerging Markets Index outperformed the S&P 500 for the first time since 2017 (EM gained +18.5% versus the S&P 500’s +18.4%). And, Asian emerging markets were the best-performing equity markets globally, with China, Taiwan and Korea all up around +40% on the year (in U.S. dollar terms).

So was 2020 an anomaly, or was it the start of a longer period of outperformance for emerging markets? We think there are three key things to consider in answering that question.

1) Emerging markets tend to do well when global trade is improving, commodity prices are resilient, and the U.S. dollar is weak.

Let’s start with trade. To get a gauge for how EMs might perform, exports and commodity prices give us insight. Exports are often the most volatile part of the EM growth cycle, and matter a lot for corporate earnings and for economies’ currencies—more trade tends to lend itself to higher profits and a stronger currency.

And although commodities now only account for 30% of EM exports (far less than in years past), commodity prices tend to reflect global growth. Said another way: When the world experiences broad-based growth, commodities tend to do well (think: more production, trade and travel). Commodity prices also tell us a lot about risk appetite and have been highly correlated with performance of EM (as a risk asset class).

Now for the dollar. Many EMs tend to hold dollar-denominated debt, and a weaker dollar makes such countries’ debt servicing costs more manageable (and provides a boost to growth). Commodities are also priced in dollars—when the dollar weakens, commodities become cheaper in other, non-dollar currencies, and demand for commodities tends to rise. (And remember what we said about rising commodity prices?)

Turning to 2021, as the global healing process marches on, we expect EM exports to rebound, commodity prices to leg higher, and the U.S. dollar to weaken modestly—all factors that lead us to favor EM this year.

2) Country fundamentals matter.

“Emerging markets” is a pretty broad term, covering over 20 countries from Latin America to Eastern Europe, to Asia. There tend to be two clear camps of emerging markets: 1) the commodity bloc, and 2) the manufacturing bloc. Both have very different characteristics and macro drivers.

The manufacturing bloc broadly consists of Asia, Central and Eastern Europe, and Mexico, and it tends to move in tandem with developed markets’ economic cycles and with global equities.

The commodity bloc largely consists of South America, Africa, Russia and the Middle East, and tends to offer more diversification and more exposure to strong cyclical growth. These EMs could do well on the expectation of more U.S. fiscal stimulus, especially in infrastructure.

Investors in EMs should take care to understand these differences—we see opportunities and diversification benefits of investing in certain segments of both.

3) “New economy” markets are thriving.

A new, third bloc is emerging: the semiconductor bloc, notably Korea and Taiwan. Semiconductors are the backbone of digital evolution; they’re in everything from your smartphone to electric vehicles. These two economies once moved in tandem with global trade, but as semiconductors have developed into the world’s most significant products, their markets have been more driven by the semiconductor demand cycle. The COVID-19 crisis accelerated our move to a digital economy, and we think this megatrend is here to stay.

Putting it all together, we’ve come to the conclusion that emerging markets are our top trade idea for 2021. A still-improving global economy, robust demand for technology, strong virus containment, a modestly weakening U.S. dollar and a more predictable path for U.S.-China tensions all strengthen our outlook for EM to outperform this year.

Want to dig deeper? Don’t miss our full piece Was 2020 a turning point for emerging markets?

All market and economic data as of January 2021 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice


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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.
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