How attractive are Emerging Markets?

The emergence of the pandemic sparked a record flight out of Emerging Market assets as investors attempted to protect themselves from increased perceived risk. This led to more than $90bn leaving bonds and stocks in the search of safe-haven assets, which caused Emerging Markets to lose nearly a decades worth of growth. However, with vaccine hopes and increased optimism, these assets are now making a comeback.

With news of a vaccine coming from Pfizer and BioNTech, Moderna and AstraZeneca, this has increased investor optimism as many investors are ignoring the consequences of the virus at present, and are instead looking into the future and the recovery of local and global economies. Emerging Market Stocks and Currencies have been some of the major winners off the back of the vaccine news, having rallied for the past 2 weeks.

The recent rally took MSCI’s benchmark EM Stock index into positive territory for the year, up 50% from its original position in March. Optimism has been reflected in Wall Street where many investors are placing Emerging Markets at the top of their lists. In this month’s Bank of America survey, one in two fund managers picked Emerging Markets as their favourite for 2021. Goldman Sachs’ analysts also predict that the market will move from ‘resilience’ to ‘outperformance’ in the coming year.

Some analysts predict that economic recovery may not even be needed to keep Emerging Market equities running high, news of a vaccine has catalysed a movement towards normality. In the past 2 weeks, Emerging Market equity funds have experienced inflows of $14bn. Debt within these economies has also seen a comeback, especially sovereign bonds issued in Dollars or other “hard” currencies such as the Euro or Pound.

One country to watch is Mexico, which will benefit from a strengthening US economy, as well as having room for further policy easing next year in a bid to support growth. Emerging Market equities could benefit as investors rotate out of highly-priced “growth stocks”, such as those on the US Nasdaq, and into “value stocks” in Emerging Markets.

However, one fundamental to the recovery in investment in these markets is the need for a weaker Dollar. A weaker Dollar will make it easier for debtors in the developing world to repay their Dollar borrowings, thereby bettering the financial health of their companies, consequently improving investor confidence.

With Emerging Market inflation and current accounts in a good place, this only adds to the attractiveness of these markets. It is clear that the world is beginning to experience recovery from the coronavirus, and this is being reflected in investment. The attractiveness of Emerging Market assets and their vast scope for growth is something that investors should be conscious of when deciding where to invest their money. We predict that Emerging Market assets will make a comeback in the foreseeable future, and are definitely an area for investors to place their capital!