What is the outlook for Emerging Markets as the world continues to face unprecedented challenges?
The state of Emerging Markets
Emerging markets (EM) are typically those of less developed countries with a low per capita income, but often with above-average growth potential. The rewards of investing in EM can often outweigh the risks. Growth can be driven by thriving, increasingly affluent populations which are rapidly adopting new and innovative technologies while also expanding their range of trading partners.
China is recovering well from the impact of Covid-19 in 2020 and, along with India, is expected to drive 40% of the world’s consumption by 2040. Economic drivers have now changed significantly with Technology, Consumer and Financial companies making up the majority of the MSCI EM Index where companies like Tencent, Alibaba and Samsung have large investment footprints and expansive global ambitions.
2020 was, as you can imagine a volatile year for EM. The strong recovery in China (by far the most important country in the sector) helped the sector to mainly positive returns. The effects of the virus varied considerably from one country to the next with India hit particularly hard, while Taiwan and Korea took actions that mitigated the effects. China, (where the virus started) emerged out of the crisis ahead of most others and returned quickly on their growth path.
Going back further, the past ten years has seen EM generally underperform in developed markets especially the U.S.
Looking ahead and despite the majority of experts stating the obvious that it has never been so difficult to make predictions, the general view for EM is positive with the most favoured region being Asia. Increasing hopes that US relations with China will improve as a result of the new administration, along with other regions such as South America has helped underpin this confidence.
So far this year EM have continued to rise, with the FT recently reporting that there had been $17 billion of inflows over the first three weeks. The hopes for the strong growth in China to continue and the longer-term effect of the vaccine roll-out has been behind this confidence. This of course has pushed valuations higher.
The short-term outlook for many emerging countries remains clouded by uncertainty about how long the Covid-19 pandemic will last and how soon activity can recover once vaccines have been rolled out. They will also be influenced by how quickly that happens in many developed nations, especially the US, given its importance to the global economy as a whole. There is also the ever-present effect of currency movements and political and regulatory risk. However, fiscal and monetary stimulus in EM has been at unprecedented levels which should assist in a faster recovery.
- Developing middle-classes and technological innovation are driving growth.
- Greater internal consumption in China as its economy evolves.
- Emerging markets provide opportunity to invest in future global market leaders.
- Rollout of vaccines should assist gradual recovery later in the year
- Some of the individual EM countries, especially in Asia will have less debt than some in the West.
- The virus has given a boost to green issues and potentially accelerated the move to creating less pollution and developing areas such as solar and wind for cleaner energy
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