2021 – The Year for Emerging Markets

Martin Currie talks secular catalysts in emerging markets.

    Alastair Reynolds

    Alastair Reynolds Portfolio Manager, Global Emerging Markets Martin Currie

    A common question we have been recently hearing from investors, particularly in the US, where domestic equities have been on a tear, is ‘will 2021 be the year for Emerging Markets?’ We believe the answer is yes but requires looking beyond the traditional notions of the asset class.

    Not the same emerging markets

    There are a couple of things worth reminding investors. Firstly, emerging markets should not be viewed as being uniform as not all emerging market countries are created equal. Take this year for instance, China, South Korea, and Taiwan, all had equity markets rise 25%1 year to date, while Brazil is down over 25%1. It comes as no surprise that those three markets which have done well have handled COVID-19 better than most countries around the world and are now closing in on pre-pandemic economic activity. This has led to strong earnings per share (EPS) growth for companies in these three countries, which is much stronger than counterparts in the US and Europe.

    Secondly, this isn’t the same emerging markets investors once knew. No longer is it synonymous with just old economy output – primarily commodities and manufacturing – rather it is an asset class filled with world class companies with industry leading intellectual property (IP) and disruptive businesses. And perhaps, a telling expression of that difference is to look at the index composition from 10 years ago relative to today.

    Technology, consumer discretionary and communications sectors combined was 27% in 2010, it is now 52% of the index2. What’s more exciting is the composition of the underlying companies have also gone through a transformation which is where we’re seeing the most opportunity in emerging markets.

    Secular trends coming to the fore

    As long-term fundamental, bottom-up investors, the multi-decade themes of sustainable planet, technology and urbanisation are the catalysts behind the exciting long-term opportunities we’re seeing in emerging markets. For 2021, the opportunities we see will likely be a continuation of the winners of 2020, which saw a pandemic-induced acceleration in secular trends in our technology sub-themes of digital disruption, cloud computing and internet companies.

    We’re also likely to continue seeing a structural shift in the global auto industry where all major original equipment manufacturers have either launched or are planning to launch multiple electric vehicles (EVs). Indeed, EVs are a considerable growth opportunity given the focus on carbon emissions around the world. Emerging market companies are key suppliers in perhaps the most critical component of an EV: the battery. They are home to four of the five largest EV battery manufactures in the world and are likely to continue to dominate this sector as a result of their cutting edge IP in EV battery production.

    Where there’s opportunity, there’s also risk. The State Administration for Market Regulation, a Chinese regulatory body, recently issued draft rules aimed at preventing monopolistic behaviour by internet platforms. The regulation of internet-based businesses is a live topic globally, not just in China. While there is nothing particularly alarming in China’s proposals, the arrival of this regulatory draft is hot on the heels of draft financial regulations. This serves as a reminder that the state intends to play an active role in shaping the rules of engagement of China’s dynamic private sector businesses.

    The importance of intra-regional trade

    Meanwhile, the outcome of the US presidential election has provided a boost to emerging markets heading into 2021. The expectation is that US-international trade relations will improve under a Biden presidency. However, in a reminder that President Trump remains in office until January 2021, he issued an executive order prohibiting US-persons from transacting in securities of any company identified by the government as being a Communist Chinese military company. The prohibition list contains 31 companies, with the possibility of further additions before the order comes into effect in January 2021. We’ll be interested to see how Biden handles the US-China relations he’s inheriting.

    Though, we view US-China relations as headline risk, the companies we’re excited about in China are not focused on US trade but more focused on trade with other countries in the region. This is in line with intra-regional trade becoming an ever more significant driver for growth in the asset class, further evidenced by the Regional Comprehensive Economic Partnership (RCEP) that was signed at a virtual summit hosted by Vietnam in November. The RCEP brings together the ten existing members of the Association of Southeast Asian Nations (ASEAN) in a partnership with South Korea, China, Japan, Australia and New Zealand. The deal is significant primarily because of its reach, encompassing nearly one third of the world’s population and 29% of global GDP.

    Economies reopening

    Mass vaccination against COVID-19 in 2021 should see economic activity return to something like normal. The resultant rebound in growth, as economies re-open, should be positive for emerging markets and furthermore, we expect interest rates to remain low.

    So, is this ‘the year for Emerging Markets?’ Yes, we believe so, but in our view it’s not necessarily about the asset class, it’s about the world class, IP-rich companies it contains. These are the companies that we believe will not only lead in 2021, but for many years to come.

    ENDNOTES

    1. Source: MSCI Index for large and mid-cap companies, November 30, 2020. Indexes are unmanaged and one cannot invest in an index. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance.

    2. Source: MSCI Index , December 31, 2010 and October 31, 2020.


    WHAT ARE THE RISKS?

    Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

    Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

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