Seeing the first month of 2021 draw to a close, investors are looking to see if predictions made in 2020 have actualised. With last year dominated by US technology giants such as Tesla, Apple and Amazon, Fortune 500 tech companies have captured the attention for driving growth in global equities. As such, many investors, both institutional and private, have missed the rally in emerging markets (EMs), specifically in East Asia.
The Morgan Stanley Capital International (MSCI) gauge, an index used to measure equity market performance in global emerging markets, has increased by 23% since the start of the year. The recovery narrative stands changed, as David Rees, Senior Economic Advisor at Schroders suggests after ‘an estimated contraction of -1.9% this year , we are projecting an expansion of +6.9% for emerging market economies in 2021.’ East Asian markets, in particular, are the key focus of investors as they are home to companies that are pioneering the digitisation of the current world, including Alipay and NIO. These countries are already operating at pre-pandemic GDP levels and their growth is yet to slow.
China is set to be a strong growth market thanks to its swift COVID-19 recovery, and its role in vaccine distribution. It is the only G20 economy to post GDP growth for last year, according to the World Economic Outlook. Trade data from China’s customs agency earlier this month showed that the country’s exports also hit a record high in December with a 535 billion USD trade surplus, the highest since 2015. Nonetheless, China faces numerous hurdles too. A significant risk is a turn in China’s credit impulse (the 12-month change in new lending as a percentage of GDP) which can be an early indicator of a change slowing economic activity. Any alienation and underperformance China may suffer could have an impact on the wider fate of EMs, such as numerous African countries which have established political and economic ties with the superpower in recent years. Moreover, China and broader Asia represent 40% and 80% of emerging market equities, which in turn suggests that the poor performance of China will reflect in their partners’ markets.
Moreover, a key determinant of East Asia’s 2021 growth rests on the relationship established between China and President Biden. Preliminary actions have shown that Biden is taking an aggressive stance in diplomatic relations, carrying on that of his predecessor, which could have the effect of isolating China. However, should the Biden administration adopt a more methodical, multilateral approach, China and numerous other EM’s will be set to benefit both politically and economically. America’s strategy may be to address China on multiple platforms, from trade policy to the sharing of technology. This has the potential to aid other EMs through direct trade agreements with the US as opposed to trading through blocs (like the Asia-Pacific trade pact) whereby agreements are not tailored to a specific market’s need, which is significant as it allows countries to target specific trade-related objectives.
South Korea, another powerhouse in the region has transitioned into 2021 in a different manner, establishing political ties with the US, and is well-placed to benefit from divides over technology between the US and China. South Korea’s telecommunications and consumer electronics companies are likely to gain global market share as their Chinese competitors face more restrictions, according to The Economist. South Korea has, however, experienced a similar economic rebound to China in 2021, after the country implemented light, but effective measures to address the COVID-19 pandemic. This may allow the economy to veer into a relatively smooth normalisation of consumption and production. However, the recovery is likely to be uneven across sectors, with industries such as tech set to benefit but with the hospitality and automotive industry set to trail other industries like utilities due to COVID-19 reducing demand.
In all, East Asian EM’s are set to outperform and drive progress toward a brighter post-pandemic climate. However, much of the recovery does universally seem reliant on export trade, with many EM countries having a large reliance on China. Thus, any uncertainty in China’s future may be a useful proxy in determining whether emerging markets are reaching their full 2021 potential as a whole.
By Tarun Odedra
Sector Head: Jared Gibson