Emerging market equities in 2021
Dr. René Dubacher
Financial Markets
The economic, monetary, commodity, and trade policy changes that have driven global equity market trends since 2018 are evolving rapidly and should continue to favor emerging markets over developed markets this year.
The economic, monetary, commodity, and trade policy changes that have driven global equity market trends since 2018 are evolving rapidly and should continue to favor emerging markets over developed markets this year.
As the economy now moves from an early recovery phase to an expansion phase, market returns are likely to be more broadly based. Commodity markets appear to support a positive scenario for emerging market equities relative to developed market equities. The performance of the MSCI Emerging Markets (EM) versus the MSCI World Index closely tracks the movements of the Bloomberg Industrial Metals (BCOMIN) sub-index. The BCOMIN index has been rising strongly since April 2020. The favorable technical environment for industrial metals is expected to support the relative price performance of emerging market equities in Europe, the Middle East and Latin America, which are highly correlated with industrial metals prices.
The following chart shows the relative performance of emerging market equities (MXEF) versus industrialized countries (MXWO), from index provider MSCI, compared to the Bloomberg Industrial Metals Index (BCOMIN) :
Relative performance emerging markets equities vs. world equities vs. industrial metals
In addition, it is worth noting that the MSCI Latin America valuation relative to the MSCI Emerging Markets is at its lowest level since 2015; it is more than two standard deviations below the mean, i.e., historical experience. There is likely to be a revaluation, particularly in the event of cyclical sector rotation. Indeed, Latin American markets have a highly pro-cyclical sectoral composition.
The following chart shows the price-to-book ratio of the MSCI-EMMA Index versus the MSCI-LatAm Index:
P/B Emerging markets vs. Latin America Equities
2021 could be a banner year for "old economy" companies in China, as profits are likely to rise again. The energy sector will spearhead this development. At the index level, a rebound in financial stocks will be key to MSCI China's earnings, as the sector accounts for nearly 15% of the overall index. The financial sector is expected to recover from its earnings decline in 2020 and record the fastest earnings growth in the sector in many years.
