Rallying Behind The Latest Moves In Emerging Markets

Emerging market (EM) equities cooked up a massive rally at the end of 2020, gaining 55% over the last nine months of the year and beating the S&P 500 Index by nearly 8%1.

Much of the market narrative throughout the year was about the growing dominance of U.S. large-cap tech—secular champions whose businesses are the rare beneficiaries of a work-from-home environment. But, although it got little fanfare, ex-state-owned enterprises in emerging markets (EM) managed to outmuscle even the formidable NASDAQ 100 following the market’s rock bottom in March. 

WisdomTree’s Model Portfolio Investment Committee entered 2021 with a positive outlook on EM equities. Despite the impressive rally thus far, we have reasons to believe EM can be a strong place for allocators to turn to again in 2021. A few reasons: 

A sinking U.S. dollar: The dollar has continued on the slide that started when global risk appetite rose from the grave in March. EM equities have a strong negative relationship with the dollar, and additional fiscal stimulus measures from Congress may have the effect of further dollar weakness in a reflationary environment.

  • A sinking U.S. dollar: The dollar has continued on the slide that started when global risk appetite rose from the grave in March. EM equities have a strong negative relationship with the dollar, and additional fiscal stimulus measures from Congress may have the effect of further dollar weakness in a reflationary environment.
  • Resurgent positive sentiment: EM experienced nearly $48 billion in outflows in the first eight months of 2020. By the end of December, EM had experienced net inflows in every week of the final four months and finished back in net inflow territory for the year2—a stunner of a positive turn in investor sentiment and positioning. 
  • Rising earnings growth expectations: Earnings expectations troughed in October and have soared in recent months. Consensus 2021 and 2022 earnings growth expectations are now at 34% and 16%, respectively3.
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