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Emerging market (EM) equities have rebounded by more than 40% from the lows reached in March, due in large part to the tremendous monetary and fiscal stimulus in both developed and EM countries. While we all await clarity on a potential second wave of COVID-19, the timing of vaccine development, and the outcome of the US election, we’d like to discuss five questions that are shaping our thoughts on EM equities right now.
1. How robust and sustainable will the post-pandemic economic recovery be?
We are already seeing economic activity recover as economies re-open from pandemic-induced shutdowns. The decline and rebound in financial markets have been both sharp and swift, allowing for hope that economic recovery will follow the same path. It is likely too soon to tell just how robust and sustainable the recovery will be at this point, as damage to some parts of the economy will be lasting or even permanent. Moreover, the risks of a second wave of COVID-19 in the fall could imperil recovery trajectories and stimulus efforts.
The size and breadth of monetary and fiscal stimulus implemented in the wake of the crisis, globally, is unprecedented. The IMF forecasts shown in Figure 1 suggest sharp economic recovery in 2021, setting real GDP growth firmly back in positive territory. While this is good news, we still do not have much visibility into the sustainability of growth beyond that point. It is also important to keep in mind that not all emerging markets are the same, and that high economic growth doesn’t always translate into great equity performance. A strong rebound in economic activity will naturally turn the spotlight toward economically sensitive companies. Further, the extent to which interest rates increase will begin to diminish one of the favorable catalysts behind the strong performance of growth stocks.