Why EMs present a bargain-hunting opportunity

Post-pandemic rebound and secular factors expected to persist into 2021, though investors must remain judicious

Why EMs present a bargain-hunting opportunity

While all eyes have been on the U.S. equity market and its comeback from COVID-19 pandemic lows, a similar revival in emerging markets could present better opportunities for investors prospecting for hidden gems.

In a new note, Regina Chi, vice president and portfolio manager at AGF Investments, noted that in the period from late March until the end of November, the MSCI USA Index rose by more than 60%. Over that time, the MSCI Emerging Markets Index ascended by more than 60% as well as several EM countries avoided the worst effects of the pandemic or quickly and efficiently dealt with them.

“In 2021, investors should expect a continuation of the late- and post-pandemic recovery in Ems,” Chi said, noting further that the MSCI EM index has a forward price-to-earnings ratio of about 19x, as opposed to 26.5x for the MSCI USA index, based on data from Factset. Greater-than-expected monetary and fiscal policy responses to the pandemic across many EMs, as well as successful candidate vaccines that can potentially be distributed in the first half of 2021, also lay the groundwork for a smooth path to recovery.

Longer-term trends, she added, bolster the case for positive EM sentiment. With the rising impact of digitalization, technology and retail companies have an expanded base of consumers and a wider set of opportunities. The acceleration of the e-commerce growth trend in China, South Korea, Singapore, and Brazil, she projected, would continue at a moderated pace post-pandemic. E-commerce laggards among ASEAN countries and India, she added, could be pushed dramatically toward digitalization as COVID wears on.

“Meanwhile, a wave of political reforms should enhance several EMs’ economic prospects and their risk profile for investors,” she said. Among those reforms were transformative pension and tax reforms negotiated by Brazil’s Bolsonaro government; an ambitious labour and investment reform program in Indonesia; and labour and agricultural policy reforms coupled with a “Make in India 2.0” initiative undertaken by the eponymous country.

“Finally, China’s so-called dual circulation strategy is at the heart of its five-year plan for 2021-2025,” she said, noting the country’s two-pronged goal of opening itself to the world while boosting demand within its own market. “This could help insulate China’s economy from trade-related shocks, but not mitigate them entirely. Even if at a lower volume, trade and geopolitical tensions between the U.S. and China will continue with Joe Biden as president.”

She also suggested that a desire among corporations to curb trade-tension risk and diversify supply chains would benefit Asian economies such as Vietnam, the Philippines, Malaysia, and India, as well as certain Eastern European countries.

Despite these converging tailwinds, however, she noted investors should remain cognizant of lingering risks. There’s the outside chance of a strengthening U.S. dollar or rising interest rates; policy backstops to growth could weaken; and trade tensions could overheat.

“That’s why it’s important that investors take country-specific factors into careful consideration,” Chi said. “If they do, it will be in the context of both short-term and secular factors that support Emerging Markets for 2021 and beyond.”

 

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