Recent underperformance of emerging market (EM) equities has left them looking relatively attractive on a valuation basis. And as EM countries accelerate their vaccination programs, we believe further reopening and growth could be on the horizon. We have seen this scenario play out in developed markets, and as EMs gain better access to vaccines it should provide a catalyst for economic recovery.
EM performance poised for rebound
Emerging markets (EM) initially saw strong performance at the beginning of this year.1 Although, this momentum quickly faded as the USD again began to appreciate on higher US yields amid rising fears of inflation, putting pressure on the exposure due to its high negative correlation with the USD.
Looking to the second half of this year, however, EM now looks especially well positioned for a rebound. In addition to the recent drop in US rates, which should help to take some of the upward pressure off the USD, there are also more structural trends that could support the EM complex.
EM equities’ recent underperformance means they look relatively attractive on a valuation basis, particularly when you consider that analysts expect earnings per share growth to be at 36% for the next 12 months.
More vaccines, more reopening, more growth
While EM countries have been slow off the mark with their vaccination programs, we should begin to see these programs accelerate now that developed market (DM) countries have vaccinated the majority of their populations. DM countries had previously been aggressively buying up vaccines, leaving very little supply for EM, but now that most DM have built up their stockpiles there should be less pressure on demand. Moreover, supply has begun to catch up with demand, so there are no longer the extreme shortages we saw previously. We should therefore expect DM to pass the baton of growth to EM as the year progresses and more EM countries are able to begin reopening.
Admittedly, this scenario may not come to fruition in the immediate future, as there is still likely to be some lag before we see EM really start to recover economically. But investors who believe EM can benefit from the same reopening trade that developed markets have would be better off accessing EM exposure early to ensure they capture this trend.
Chinese equities look favourable on valuation basis
Within EM, Chinese equities deserve particular attention due to the fact they are trading significantly below long-term averages relative to the rest of the world. Chinese equities have also seen their correlations to other markets fall recently, meaning they can act as a diversifier in a portfolio. Furthermore, the recent punitive actions by the Chinese government on tech companies may offer a relatively attractive entry point, assuming these companies are able to recover from these actions.
EM is also the most underweight region among institutional investors and has seen strong inflows on both a one-month and three-month basis.
How to access these themes
Investors can access this emerging market trend through the SPDR MSCI Emerging Markets UCITS ETF. Investors seeking exposure to China can consider doing so through the SPDR MSCI EM Asia UCITS ETF, where China currently makes up 46% of the portfolio.2 To learn more about these funds, and to view full performance histories, please click on the links below:
Rolling Trailing 12-Month Excess Return of MSCI USA vs. MSCI EM and MSCI EM Asia
1 Source: Morningstar Direct, as of 30 June 2021.
2 Source: ssga.com, as of 8 July 2021.
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