Emerging Markets Outlook 2021

Emerging markets started on a very positive note, only to be pulled down massively by the concerns around the coronavirus pandemic. It then rallied back to new highs by the end of 2020 after strong fiscal and monetary stimulus by developed as well as emerging market countries.

The response to the pandemic has been enormous and swift and as a result we have seen a decent recovery in earnings and a strong economic outlook going into 2021. We remain confident on both an economic recovery and a good market performance from emerging markets in 2021.

Activity has rebounded sharply, and major Asian countries now have better control of Covid-infections. The vaccination drive is also looking quite positive, as most of the population is expected to be vaccinated by the end of the summer, particularly countries such as China, India and Korea.

Emerging markets have underperformed developed markets for the better part of the last 10-12 years, and we believe that the improving growth outlook – backed by some credible reforms undertaken over past few years – opens up opportunities for a catch-up.

We expect markets to perform better going forward, mainly driven by the following factors.

Emerging market currencies have seen a serious depreciation over the past few years, mainly due to deteriorating growth outlook, external financing pressures driven by higher current and fiscal account deficits, and rising rates in the US before the pandemic.

The situation has, however, improved meaningfully over the past 12 months with respect to current account deficits. This should lead to less pressure on financing of the deficits. While the fiscal situation remains stressed, there deterioration has been much less severe compared to that of developed markets.

The global liquidity scenario has improved considerably given monetary expansion by both the Fed and ECB, and emerging markets should attract global flows as yields still remain fairly attractive compared to the developed world.