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The US election outcome and the hopes that the Covid-19 vaccine will be a tangible reality by the end of the year or the beginning of 2021 bode well for a worldwide economic recovery.
China is leading the global recovery, owing to its virus containment and strong rebound, which is being driven by internal demand, exports and services. It is set to be the only major economy with positive GDP growth this year. This is supporting our positive view on China and most of the Asian countries, and we believe the recovery will expand to Latin America and CEMEA next year.
In an accommodative policy framework, the hunt for yield will remain and will provide a positive backdrop for EM debt in 2021. There is still room to tighten spreads, especially in HY, and the expected weakening of the USD will likely support local currencies.
In 2021, EM equities will likely gain traction thanks to the earnings rebound.
Investors may play the growth theme, adding exposure to China, the New Silk Road and domestic growth stories, as well as broadening their allocations to LatAm and CEMEA. However, selection will be key in mitigating the potential risks, such as a resurgence of inflation, a liquidity crisis or idiosyncratic fallouts.
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