Emerging Markets Set Up For Growth In 2021

Early indications suggest that global growth is continuing to recover from mid-2020 lows thanks to historical fiscal and monetary stimulus, positive vaccine developments, rising commodity prices, strong demand from China, and a return towards consensus-based trade policies in the US. In this piece, we delve into why these drivers are expected to uniquely benefit emerging markets in 2021, making them an attractive area in both debt and equity asset classes.

Key Takeaways:

1. In reaction to the COVID-19 outbreak last March, emerging markets (EMs) initially sold off more sharply than developed markets (DMs), but saw a stronger recovery owed to higher commodity prices and robust demand from China.

2. Continued performance in EMs is likely to be driven by a weakening dollar, attractive valuations, and long term-growth fueled by consumption and digitalization.

3. In equity markets, we see compelling opportunities for growth within Developing Asia, Latin America, and Europe. We additionally recognize the attractiveness of EM debt given low interest rates in developed markets and generally higher yields offered by EMs.

EMs Amid the Pandemic

Because of their higher dependence on commodities and exports, and greater sensitivity to market volatility, EMs initially fared worse than developed markets in the early part of the pandemic. EMs were hit particularly hard in March 2020 after oil prices collapsed amid plummeting demand because of COVID-19. Beyond that, less-developed health care systems struggled to contain the virus and treat those afflicted, resulting in harsh shutdowns and significant societal challenges. With a “flight to safety” amid the early days of the pandemic, many investors around the world reallocated to US assets, pushing up valuations on US stocks, bonds, and the dollar.

But towards the end of 2020, EM’s began to turn a corner. EMs recovered their losses and started outperforming developed markets by October, fueled by rising commodity prices, a weakening dollar, cheaper valuations, falling infection rates and overall economic robustness.

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EMS vs DMS - 1 Year Total Return (%)

Past performance is not a guarantee of future results.

China Defied the Global Contraction in 2020

Within EMs, China demonstrated unique economic robustness in 2020. The world’s second largest economy and the largest EM only experienced an economic contraction in Q1, before effectively containing the spread of COVID-19 and becoming the only major economy to post positive growth for the year. In Q4 2020, China’s economy continued to show strong resilience with economic activity further strengthening after two quarters of expansion. Consumption, industrial output, and investment grew as more factories came back online throughout the year and consumers accelerated spending alongside broader reopening. Industrial production recovered early in 2020, but continued to rise throughout the year, and by November reached its highest level in over two years. Fixed asset investment improved throughout Q4, while the urban jobless rate also fell for the fourth straight month in November, suggesting a protracted recovery across the Chinese economy heading into 2021.

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Past performance is not a guarantee of future results.

Looking Past the Virus Towards Higher Long-Term Growth

Despite lingering uncertainties about the global reopening process, vaccine distribution and virus containment measures have elevated global growth expectations for 2021. After a contraction of -3.5% in 2020, the global economy is forecasted to grow 5.5% in 2021.1 While developed markets are anticipated to achieve 4.3% growth in 2021, EMs on average are forecasted to achieve 6.3% growth in 2021, as accelerated global trade and higher commodity prices boost EM current account balances, while general economic activity boosts domestic consumption.2 While EMs are uniquely positioned to benefit from a global recovery, considering how sharply these markets were hit in 2020, we believe their economic resilience to crisis, long-term structural and demographic shifts supporting consumption growth, and the economic impact of technology and digitalization make them especially compelling over the longer term.

  • Post-Crisis Resilience: Following a year full of volatility for commodities in which oil fell below zero and choked supply chains forced farmers to dump their goods, commodity prices across the board are bouncing back with a vengeance. Oil is now above $60 a barrel, while metals prices have continued to climb because of shorter term supply constraints, accelerating demand, and inflation and infrastructure projects looming on the horizon.
  • Consumption: Chinese demand is a major driving force for the current commodity rally, including renewed demand for metals as factories reopen and an ever-growing need for agricultural products as China contends with scarcity in its own food supply. With China’s economy months ahead of the West in terms of its recovery, demand for consumer goods has extended from staples to discretionary goods – including domestic travel and luxury retail.
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Disclosure: The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate ...

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