Heading into the last month of the pandemic year, capital has shown a strong appetite for emerging market assets. Inflows have been supported by the region's economic rebound, a weak US dollar, and the (relatively) high-interest rate environment.
Foreign investors poured a record $76.5 billion into emerging market portfolios last month, encouraged by the news of a Covid-19 vaccine as well as a peaceful transition of presidential power in the US, according to a report from the Institute of International Finance in early December.
Of that sum, as much as $39.8 billion made its way to emerging market equities, with China seeing about $7.9 billion inflow, says the report.
The economic rebound is likely to be swifter in 2021 for Asia Pacific emerging markets than for developed markets, according to a report at the start of the month from Fitch Ratings, though it warned that the recovery would be uneven and with challenges.
This was echoed in another recent report, this time from Moody’s, which pointed out that moderate and uneven economic recovery amid the coronavirus pandemic as well as political and trade uncertainties pose risks for financial institutions in emerging markets throughout Asia, Latin America, Europe, the Middle East and Africa in 2021.
AsianInvestor asked nine experts about how they see investment opportunities in emerging markets and which types of assets and which countries are their top picks.
The following contributions have been edited for clarity and brevity.
Nicholas Chui, portfolio manager global emerging markets equities
We are constructively bullish on Asian equities but do not anticipate a straight rise ahead.
Positive factors include valuations we consider reasonable, a policy and economic backdrop supportive of a rebound in corporate earnings, and a possibly more stable and predictable US-led external environment.
In a low [interest] rate environment, the US dollar is likely to stay put or weaken somewhat against Asian currencies. This would bring near term benefits for countries that offer relatively high yields but that are vulnerable to sudden market pullbacks due to their reliance on foreign capital flows. India and Indonesia are examples of this, and both remain overweight in our portfolios.
Separately, we have bought out-of-favour stocks, including hard-hit travel-related stocks, and industrial and materials stocks in China. We added some auto stocks from India that we believe may benefit from resurgent demand in part due to a strong festival season.
Sylvia Sheng, global multi-asset strategist
JP Morgan Asset Management
We are constructive on the outlook for emerging market assets in 2021.
An important factor that underpins our constructive outlook for emerging market assets is our expectation for a weak US dollar. We believe the US economic exceptionalism of the past decade is coming to an end and that the US dollar will struggle to sustain its structurally rich valuations as its real yield advantage is eroded.
We expect above-trend global economic growth next year to provide a favourable macro backdrop for the more cyclically sensitive emerging market assets. More predictable trade policy actions under a Biden presidency, with less emphasis on the use of tariffs, should also support the growth of emerging market economies, given that they are more leveraged to the global trade cycle.
Our positive growth outlook for 2021 suggests more upside for emerging market equities than for emerging market sovereign debt. Within emerging markets equities, we expect to see recovery from the laggard markets this year, such as Latin America, which is likely to benefit more from a successful vaccine deployment and improving commodity prices.
Sean Taylor, chief investment officer, Asia Pacific
Emerging markets and Asia are our favourite picks for 2021.
Emerging markets are likely to benefit from the global recovery in 2021 with the help of vaccines made available, possibly by the first quarter of next year. We expect emerging markets ex-China to play catch-up with North Asia in 2021, with a higher delta of growth.
North Asia has managed the pandemic effectively without amassing significant new government debt which bodes well for long term growth prospects. The Biden-win scenario is also very positive for Asian and emerging markets with more predictable foreign policies and a weaker US dollar.
Within equities, we are constructive on Asia and emerging markets. North Asia should outperform due to higher growth and [a positive] earnings outlook. Emerging markets would be a good play for the cyclical pick up in 2021. We are forecasting a double-digit return for emerging markets equities and expect the earnings per share level for the MSCI AC Asia ex-Japan Index to surpass pre-Covid-19 levels in 2021.
Within fixed income, we remain constructive on Asian credit due to a weaker dollar, relative better economic conditions and higher local investors’ participation. It also has a strong quality tilt when compared to other emerging markets and offers a spread pick-up over comparable US corporates with significantly less interest rate risk.
Stephen Chang, portfolio manager, Asia
While the pandemic situations vary across emerging markets, Asia is expected to experience a strong and sustainable economic recovery in 2021.
China, as the largest economy in the region, has outperformed many other countries globally with sharper recovery and higher resilience. We think the long-term plan could benefit several strategically important sectors as well as domestic consumption-driven industries.
The low yield environment has driven global investors to search for additional income and should lead to an increased allocation to Asian bonds in light of their attractive valuations.
Asia investment grade debt currently offers a spread premium of more than 65 basis points to US investment grade while Asia high yield offers more than 250 basis point additional yield over comparable US high yield bonds.
We believe that Asia hard currency credit will be a good expression into 2021. We believe that the differentiation between the winners and the losers will begin to emerge given the macro policy directives and changing sector dynamics. This will provide significant opportunities for active bond investors.
Paul Sandhu, head multi-asset quant solutions Asia Pacific
BNP Paribas Asset Management
Before the Covid-19 crisis, the emerging markets diversification trade definitely helped emerging markets equity and debt.
Fund flows into Asia were positive and global portfolios began to up their allocations specifically in China assets. The Covid-19 crisis market impact in February/March was significant and brought on a risk-off sentiment which effectively rewound the global diversification trade.
2021 will bring us back where we left off, with a few added accelerants in the diversification fire.
First, Asia has managed much better through the Covid-19 crisis than developed markets. China, in particular, hasn’t had to use as much economic capital as other large, developed economies. This is a major positive when it comes to 2021.
Second, the risk-on trade coming from the Biden victory in the US coupled with the vaccine and expected stimulus package in the US is back on, which will help emerging market currencies appreciate versus developed markets and should lead to added flow.
We see emerging market equities as a key performer in 2021. Hard currency emerging market bonds will also continue to outshine developed markets in terms of yield, so look for them to outpace as well.
Devan Kaloo, global head of equities
Aberdeen Standard Investments
The emerging market universe has evolved over the past decade to include more high-quality technology companies. These firms are helping to change societies that already benefit from a growing middle class and supportive demographics.
Covid-19 has accelerated the pace of change. E-commerce has experienced dramatic growth because of the lockdowns, and this has forced many companies to change their business models.
An area of growing opportunity is renewable/green energy. For example, China aims to be carbon neutral by 2060, a goal that will require an investment of some $15 trillion over the next 30 years.
Active management and owning quality remain the best ways to mitigate risks in emerging investing. Financial distress brought on by the pandemic will expose weaker firms, allowing active investors to exploit mispricing opportunities. Investors should analyse companies’ balance sheets, cash flows, ESG standards and the long-term sustainability of their strategies.
Chang Hwan Sung, portfolio manager, investment solutions
Within equities, we favour emerging markets compared to developed markets in 2021, based on our tactical model that uses regional leading economic indicators and global risk appetite.
We observe that growth is above long-term trends in Asia and is now accelerating. For this reason, we like Asian equities, including China A-shares. This is also reinforced by attractive local asset valuations and an expensive US dollar.
Among Asian debt, we expect significant foreign inflows into China’s onshore fixed income due to its inclusion into major fixed income indices and see opportunities not only in debt issued by the government and policy banks but also in credit as well. Bottom-up credit analysis could generate significant alpha over passive exposure.
In Latin America, Central and Eastern Europe, and the Middle East, our view is that growth is still below long-term trends due to Covid-19 but it is accelerating quickly back to its long term average. In these regions we still like equities but we also like sovereign bonds and risky fixed income. In terms of the forex exchange market, we believe that interest rates will stay low in the US for an extended period of time, and we like high interest rate currencies such as the Indian rupee, Indonesian rupiah and Russian ruble.
Chia-Liang Lian, head of emerging markets debt
Western Asset Management
Western Asset is constructive on emerging market debt going into 2021.
Emerging market growth thrives on external demand and world trade. Improved prospects for a Covid-19 vaccine should eliminate the negative tail risks for the global economy. Trade frictions are expected to moderate, a trend that should reinforce the incipient upturn in global growth.
Of note is the growth leadership of China, the world’s second-largest economy, which the International Monetary Fund projects will grow by 8.2% in 2021. We believe that should have a salutary effect on emerging market assets.
We view the heterogeneity of the asset class as a unique strength. It presents a dynamic set of opportunities to customise around or rotate into attractive segments, based on return target and risk tolerance.
Given the extended period of low rates globally, we view high-grade dollar emerging market bonds (Indonesia, Israel, Panama, Qatar and the United Arab Emirates) as a core allocation.
We see select opportunities in local government bonds (China, Mexico and Russia) offering relative value and diversification benefits versus developed market opportunities.
Mary Nicola, portfolio manager, global multi-asset
We expect global growth to resume in 2021 and to broaden out. Within emerging markets, we maintain a selective bias given the varied opportunities and risks.
In the next nine to 18 months we are constructive on Korea and China equities as growth continues to improve in the region. Korea as a cyclical market will benefit from global growth.
Elsewhere in emerging markets, we continue to see attractive valuations in emerging market high-yield hard currency and Asian US dollar investment grade [debt].
With developed market rates staying lower for longer (and expected to remain below inflation), real yields can still be found in emerging markets especially non-backstopped markets, in other words, those with no central bank intervention.