■ Global investors are currently dealing with two key challenges: find decent yield for their fixed income portfolios in a world of ultra-low or negative interest rates and access some exposure to growth at a reasonable price. EM market assets may offer some opportunties in addressing these challenges and have the potential, in our view, to outperform other asset classes both in equity and fixed income in 2021. However, investors should be aware of the heterogeneity of the EM universe and the transformation occurring in EM. Each country has specific drivers, monetary and fiscal policies, and political landscapes. In a world of retreating global trade, domestic growth drivers are becoming increasingly important. The role of China and Asia in the geopolitical order, as a global growth engine and new centre of gravity, became even more significant in 2020, with Russia willing to play a stronger role as well. These elements have to be considered in building an allocation in EM. Deep expertise in assessing all these dynamics – macro and bottom-up – and looking at the opportunties from a cross asset perspective (where- and however they are emerging) are, we believe, the key means to gaining exposure to superior growth and yield premiums and at the same time mitigating idiosyncratic risks.
■ Looking in detail at the 2021 EM macroeconomic outlook, the prospects for a widespread vaccination campaign are supportive for a global economic recovery in 2021. Markets have reflected this positive sentiment recently. Emerging countries should be able to take advantage of this supportive global outlook and therefore our EM GDP growth forecast is 5.7-6.5% for 2021. Such a rebound might be uneven across countries and regions, and we could see some ‘stop-and-go’ phases, depending on the speed of vaccine rollouts and the evolution of the virus and its new mutations. We do not expect to see inflationary tensions over the coming year and thus support an accommodative policy framework for central banks (CB). Some CBs may continue to use non-conventional tools, such as QE, although fiscal measures have little room to grow due to the recent new highs in indebtedness that some countries took on to address the pandemic. The outcome of the US election is something to watch carefully for its implications on rates and the dollar, which is critical for EM assets. Markets were not fully discounting a ‘Democratic sweep’ and we could see some overshooting in the short term of US rates. Also, despite the prospects of a weaker dollar in the medium term being confirmed, in 2021, we could see a widening GDP growth differential between the US and the rest of the world thanks to the upcoming fiscal boost that could support the dollar. On foreign policy, we expect to see a less aggressive attitude towards China from the Biden administration, although we still expect to see a tough stance from the new government.
■ Fixed income and FX views: We expect to see some continuation of strong technicals and inflows in support of EM hard-currency debt. We prefer the HY to the IG space, as the former has more room to tighten and could benefit more from these conditions. EM local currencies have all the ingredients to perform well in 2021: low inflation, CBs in a low-rate environment, and a cyclical growth recovery. An area of attention should be the evolution of the dollar, the combination of local currency appreciation and potential spread compression will support this asset class. Asian countries are ticking more boxes than others. Commodities are rebounding from their recent lows, thanks to the projected global recovery. EM corporates offer carry opportunities, although spreads appear tight historically. Earnings have been recovering during the last quarter of 2020; investors need to be selective in terms of bond picking and pay attention to the measures that could be implemented by the new US administration and their implication for US rates.
■ Equity: Markets should benefit from a reopening dynamic, economic recovery, and improvement in earnings. The market will monitor the vaccination process and availability within EM countries. EM equity valuations are attractive in the current global context, although some growth sectors look disproportionately expensive. Therefore, we favour some cyclical or value stocks. Going in depth into countryspecific features is critical, as the outlook and fundamentals are significantly different. Frontier markets supported by China’s recovery are an attractive area to look at, as well as India as a long-term growth story. The development around the New Silk Road theme, in our view, also represents an attractive investment opportunty for the medium term.
