Xavier Hovasse argues emerging markets have weathered the covid storm more efficiently than their developed counterparts, and are in for a stellar 2021.
A very common question that investors ask themselves nowadays is: Is now the time to invest in emerging markets? After several years of cautiousness, it seems that emerging markets' time has finally come. As developed markets continue to hit bumps along the road to recovery, so-called emerging countries across Latin America and Asia in particular weathered the storm much earlier, and are now cruising along a much smoother road.
Crucially, as these emerging countries managed to respond to the covid-19 crisis more efficiently when compared to the rest of the world, it is likely that domestic companies will benefit from a more favourable economic environment, which is good news for investors.
Even though the pandemic began in Asia, the number of coronavirus cases per million people in the region, as well as in Latin America (except Brazil), has been much lower than in Europe or in the U.S. in 2020. The effective management of the health crisis has had a strong positive impact on emerging economies.
Furthermore, in some countries, particularly across Asia, the estimated amount of money spent on supporting the economy in 2020 was far lower than in Europe and in the U.S. Less than 4% of GDP in Asia was spent compared to more than 6% in Europe and over 8% in the U.S.
Therefore, emerging countries, especially China, showed signs of economic recovery much sooner than in so-called developed markets. For instance, Chinese industrial production returned to its pre-crisis levels as early as last summer whilst China's exporters gained market share over the past year.
Consequently, China's economy is expected to grow 8.2% this year after an increase of 1.9% in 2020 while the Euro area's growth may reach 5.2% in 2021 following a 8.3% decline last year.
Improved economic fundamentals may also help companies from emerging markets generate higher earnings and support their share prices which still need to catch up with developed markets. Whilst emerging markets' equities gained 18% last year, there is still a way to go given their 10-year underperformance relative to developed markets.
Although it has not appeared hugely attractive over the past few years, a big portion of the underperformance of emerging markets' assets in recent years was due to a strong U.S. dollar cycle, with emerging markets' currencies depreciating against the dollar. Now we think we are on the brink of a major turn in dollar cycle, with the measures taken by the American government to support the U.S. economy likely to lead to a weaker dollar.
In addition to a favourable economic context, emerging markets, especially Asia, are at the forefront of the current technological revolution, which is accelerating due to the Covid-19 crisis. Indeed, the pandemic has forced structural changes to the way we work, the way we shop, the way we pay and even the way we entertain ourselves.
You will find some winners of the digital revolution in the West Coast of America, in Silicon Valley, but there are also some, and mostly, in Asia. Asia is the biggest winner of the current industrial revolution. There are more unicorns in China today than in America.
They have developed a huge ecosystem. Asia is investing heavily in the technologies of the future, and most people in developed markets underestimate what is happening in these countries.
India is another great example of a country that is benefitting from this revolution, having skipped the stage of desktops and laptops and going straight to modern technology such as smartphones.
In India, the cost of a smartphone as well as its data and connection are significantly cheaper compared to developed markets, with the growing take-up of modern technology by its monumental population allowing India to leapfrog other economies in tech terms, creating attractive investments opportunities for long term investors.
Although the developed world's stock markets have gained most of the attention since the new year, emerging markets have already rebounded after witnessing declining Covid-19 rates even without a vaccine, with them in a much better position to grow as the developed world continues to recover.
Xavier Hovasse is head of emerging equities at Carmignac
