Finding value: 2021’s key themes for emerging markets

Emerging markets were tested to their limits in 2020, but most made it through with their economic growth trajectory intact.

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The world is slowly recovering from a devastating year that tested the governments, policymakers and companies in emerging market to their limits. The landscape in 2021 may look quite different to the world we left behind at the end of 2019, before the Covid-19 pandemic hit. While 2020 has shown the difficulties of predicting the future, we believe a number of themes are likely to dominate in emerging markets this year.

A changing relationship with China 

China and the US are engaged in the long-term process of redrawing their relationship. While President Biden is likely to be more measured in his approach to US/China relations, the thrust of policy will remain the same. Neither country is likely to grant unfettered access to their markets, with implications for businesses on both sides. 

China is likely to become more self-reliant as a result. Pruksa Iamthongthong, investment manager at Asia Dragon Trust, believes this is happening already as the country adopts its own e-commerce practices, technology innovation, and advanced semiconductor manufacturing. She adds: “This self-reliance is particularly important in terms of the restrictions we’ve seen from the US on Huawei, which have cut China off from advanced semiconductors.” (The US government now requires any manufacturer selling products to Huawei to get a license.) A self-reliant China should be good for companies in the region with the right capabilities.

A new broom in the US 

While the new US administration is unlikely to take an approach to China that is materially different to its predecessor, it may adopt a markedly different foreign policy elsewhere. Joe Biden has been a long-term “friend” to South America, particularly during his vice presidency, and is likely to shift the approach that prevailed under the Trump administration. 

More generally, the outcome of the US election plus greater global stability could contribute to a weaker dollar. This has implications across emerging markets. Andrew Lister, investment manager at Aberdeen Emerging Markets Investment Company, says: “The past decade of a high dollar has undoubtedly contributed to a challenging period for the asset class. The dollar has been weakening steadily over the past year, which presents a much better base for emerging market currencies and stock markets to deliver returns for investors.”

The green revolution 

This is likely to be every bit as important in emerging markets as it is in developed markets, not least because this is where climate change hits hardest. China has now committed to carbon neutrality by 2060. Iamthongthong says: “China currently makes up 28 per cent of global emissions and 85 per cent of its energy mix is still in fossil fuels. Should this ambition from China be realised, we are likely to see huge growth in renewable energy – across wind, solar and electric vehicles.”

Economic recovery 

The recovery across emerging markets is likely to take root in 2021, not least because many countries have not been as hard hit by the virus as developed countries. Lister says: “China has proven it has dealt with the pandemic adeptly. Taiwan and Korea have also done well by using technology and short, sharp lockdowns. Economies are now returning to normal. GDP growth in China is likely to be positive this year and similar strength has been seen across emerging markets. 

“Today, we see a much smaller contraction in emerging economies’ GDP and, looking into 2021 and beyond, economists are forecasting more rapid growth for these countries. Non-China emerging markets should account for almost half of global growth within five years.” By 2025, 80 per cent of the world’s growth could be coming from emerging markets. 

This could be a better time for some of the unloved assets in emerging markets. Aberdeen Emerging Markets Investment Company, for example, holds a significant overweight position in frontier markets. Lister believes they offer exciting growth potential at low valuations. While the trust still has significant weightings in “old-school” emerging markets – notably India and China – he believes the frontier market exposure should add a layer of dynamism in a recovering world.

Withdrawing the government safety blanket 

Governments and central banks have eased the pain of the pandemic with unprecedented monetary and fiscal stimulus measures. While this has worked to support economies across the globe, it is unsustainable in the longer term and countries must start to adjust to life without them. Emerging markets should find themselves carrying a lighter debt burden than many Western nations. They have not been able to borrow as readily, which has been hard in the short term, but should support growth in the longer term. Iamthongthong believes that interest rate levels still give some room for flexibility.

Technology adoption 

The pandemic has forced broader technological adoption across emerging markets, as it has elsewhere. Online services and internet names experienced a huge acceleration in 2020, often leap-frogging many years of development. The so-called “tech enablers”, such as semiconductor companies that support the roll-out of 5G, are also likely to be crucial in the new world that emerges from the pandemic. Iamthongthong has been topping up on these areas within Asia Dragon Trust. 

These are the trends as we see them today. However, we remain alert to potential changes as the world recovers from a tumultuous year. We hope for a less eventful 2021, but will be prepared for whatever it holds.

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