Are you sure you want to change languages?
The page you are visiting uses a different locale than your saved profile. Do you want to change your locale?
To say that 2020 got off to a challenging start for emerging market (EM) equity investors is something of an understatement. Fortunately, the year is ending on a constructive and optimistic note for EM. Economic growth in most EM countries recovered sharply in the latter part of Q2 and in Q3 as stimulus measures took hold and mobility restrictions eased. Positive vaccine news and the US election outcome helped to broaden those gains. EM equities are up than 60% since their lows on March 23.
As we cross the threshold into 2021, there are three considerations that we believe EM equity investors should bear in mind as they look to the year ahead. 1
From a macroeconomic perspective, abundant global liquidity, expectations for fiscal stimulus, and the anticipated recovery in mobility (driven by the prospect of vaccines) promise continued recovery in global growth and global trade. These circumstances are very strongly supportive of emerging market equities through at least the first half of 2021.
The US Federal Reserve’s shift to average inflation targeting has cleared a path for reflation; real rates should remain negative, the yield curve should steepen, and the US dollar should weaken. Most other central banks in developed markets are holding official rates close to zero or slightly negative. Even though many central banks in emerging markets have reduced rates to historical lows, those rates still offer more yield than developed markets. Liquidity, reflation, increased mobility, and improving economic growth were already becoming apparent by mid-year 2020, and the combination of the US election outcome and the better-than-expected timing and outcome of the vaccine trials provided a further catalyst for flows into global cyclical stocks and risk assets, including emerging markets.
We expect the macro backdrop to remain supportive for EM as we head in to 2021, although we remain conscious of potential headwinds in the form of stretched fiscal positions and rising debt levels, especially if economic growth disappoints as the year goes on. In addition, the efforts by central banks to “reflate” may, one day, be successful; this would have implications for rates and equity expectations.