Will Emerging Markets lead economic recovery in 2021?

Investors are encouraged by rallies in emerging markets (EM’s) in November, hinting toward future prosperity. Morgan Stanley’s Capital International (MSCI) gauge has gained 8% so far this December, with markets such as India and Brazil increasing by 7% and 16% respectively. However, the real focus skews toward East Asian markets with countries such as China and South Korea dominating two-thirds of the MSCI’s value. It is this extensive market capitalization that is encouraging long-term investment in these markets. Moving on from the COVID-19 pandemic, consumer confidence and consumption is starting to pick back up to pre-COVID-19 levels with East Asian markets driving this trend.

 

Emerging markets are set to be the driving force for a recovery in global growth in 2021. According to Goldman Sachs, EM’s are set to outperform the rest of the world in the second quarter of 2021, due to decreases in political uncertainty and vaccine development. President Biden’s political triumph may see a cooling of trade tensions with China, which will benefit emerging markets due to a larger volume of imports from emerging nations.  The development of the vaccine increases hopes of economic stabilisation which will mean that investors will be more willing to take on risk. AstraZeneca’s vaccine in particular looks set to greatly benefit EM’s. The company is offering vaccines at a fraction of the price relative to its competitors. These vaccines will be manufactured in developing nations such as India and China. This will likely lead to market growth not only in pharmaceutical equities, (9.8% growth in China since 2019) but a strong resurgence in all equities hampered by COVID-19 such as the air-transport industry. However, investors’ market hypotheses mainly rest on predictions based on the success of the vaccine. For example, many ‘pro-cyclical’ investors are sceptical about using vaccine developments as a metric to forecast future performance, according to Goldman Sachs’ Andrew Tilton. Though with 60% of global GDP belonging to emerging nations, we can expect that should there be an upturn in market activity in EM’s, it will significantly contribute to the global recovery of markets.

 

In particular, China and South Korea are markets set to benefit in 2021 from a rally in tech stocks. Both countries’ equities, alongside India and Brazil, have outperformed developed world equities by 10.5% since late June. Marcelo Carvalho, head of global emerging market research at BNP Paribas, notes that China has already surpassed its pre-crisis GDP level, depicting the countries’ true post-pandemic resurgence. These countries’ business offerings are also skewed to more information technology and communication services compared to other EM’s (Brazil or South Africa) and these industries have been noted to perform especially well in 2021. This is due to the roll-out of the 5G network by Chinese company Huawei, as well as South Korea’s Samsung investing 6.6 billion USD to provide 5G wireless solutions to Verizon, a US telecoms company. Both countries’ trade is set to grow with increased domestic exports due to the Regional Comprehensive Economic Partnership (RCEP) deal signed earlier this year. South Korea is expecting a 3.1% export growth in 2021 and China a considerably higher 8%.

 

In terms of particular investment advice, fund manager of Mobius Capital Partners, Mark Mobius, suggests that investors take a ‘diversified’ approach when looking at emerging equities. He highlights sectors such as cruises, travel, and airlines that ‘have been completely bombed out’ but have strong balance sheets and access to finance. He notes particularly however that ‘the US markets will probably do okay. But [that he believes] the emerging markets will do better.’ Andrew Hardy, co-head of research and portfolio manager at Momentum Global Investment Management recommends, when looking at Chinese and South Korean markets, analysis into the aforementioned tech firms, as well as exchange-traded funds (ETFs) due to their tax efficiency. Tax efficiency will be especially important in 2021 as governments will begin contractionary fiscal policy measures to recuperate money lost in 2020 due to the pandemic.

 

In all, investors remain undecided on how the COVID-19 vaccines will affect market growth, but many suggest emerging markets are profitable investments going forward and some even believe that Ems might be set for a 2021 boom. China and South Korea for example have been coined by investors to be ‘Goldilocks Markets’ and will likely make up a large focus on the East Asia region in 2021.

 

By Tarun Odedra

Sector Head: Jared Gibson

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