LONDON/Bengaluru (Reuters) – After several lean years for emerging markets, fund managers are bullish again on the asset class, expecting it to benefit in a post-pandemic world of improving economic growth and a frantic hunt for higher-yielding investments.
Many investors remain wary of course — after all emerging equities have trundled behind developed peers every year but two since 2010 — but top money managers speaking at the Reuters Global Investment Outlook Summit said prospects for the sector seemed bright for 2021.
Recent data reflect that optimism. Flows into emerging market (EM) portfolios surged to record levels in November while emerging stocks have returned more than developed peers in the past six months.
MSCI’s index of emerging currencies is at its highest since April 2018 and in bond markets, the yield premia investors demand to hold EM debt over developed peers has compressed sharply from its March blowout.
The sentiment U-turn stems from a burst of exuberance caused by positive news about coronavirus vaccines and rapid dollar weakening which many expect will extend into next year.
“They (emerging markets) have turned a corner for now,” NN Investment Partners’ Chief Investment Officer Valentijn van Nieuwenhuijzen told the Summit, though he warned much hinged on progress in vaccine deployment.
Economic growth in emerging markets, excluding China, is forecast by the International Monetary Fund to reach 5% in 2021, compared to 3.9% for advanced economies.
Goldman Sachs has forecast a 2021 bull market for commodities, a resource many emerging economies rely upon for revenues.
The recovery was highlighted by Citi’s economic surprise index for emerging markets hitting a record high this week.
“It took a lot longer for emerging markets to start (recovery), but that has started now… and actually a better COVID response (than the West) pretty much everywhere, other than Brazil,” said Jim Leaviss, CIO of public fixed income at M&G Investments.
He noted that emerging markets carried “real” — inflation-adjusted yields of up to 4% compared to minus 0.2% in Germany.
“For me, that looks to be the valuation opportunity.”
The world’s biggest asset manager, BlackRock, this week upgraded both EM local-currency and hard-currency debt in its portfolio, citing easy global monetary policy and dollar weakness.
Emerging markets may not be out of the woods yet.
Despite the recent surge, EM assets have lagged developed market peers for much of 2020. Bonds denominated in emerging currencies remain most unloved; with a minus 0.88% return for the year, according to FE Analytics.
“There is plenty of scope for EM to catch up, but risks remain,” Esty Dwek, head of global markets strategy at Natixis, told the Reuters Global Markets Forum.
“Expectations are for an easing in tensions with China, but it will not be as smooth as people expect.”
Under Donald Trump’s presidency, markets have been beholden to the United States’ trade frictions with China. President-elect Joe Biden has said he will not immediately cancel the trade agreement Trump struck, nor take steps to remove tariffs on Chinese exports.
Societe Generale analysts point out too that emerging markets offer relatively low yields compared to past cycles, after a torrent of interest rate cuts and a far lower global cost of capital. Philippines, for instance, this week raised $2.75 billion from the sale of global bonds at record low coupons.
A weaker dollar also won’t lift every currency, Societe Generale added, noting that EM output was not returning to pre-pandemic levels “anytime soon”, forecasting roughly flat performance in EM currencies in 2021.
In a reminder of the uneven recovery cycles across the developing world, Chinese services sector data on Thursday showed new business grew in November at the fastest pace in over a decade.
Russian service sector activity, on the other hand, shrank for the second straight month, weighed down by a resurgence in virus infections.
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