Despite a difficult 2020, emerging markets are one bright spot for 2021, money management economists and strategists said.
And the economic impacts of the COVID-19 pandemic last year highlighted once again that the term "emerging markets" is not completely accurate — particularly when it comes to China.
"China is its own special situation," said Eric Lascelles, global chief economist at RBC Global Asset Management in Toronto. "It practically eradicated the virus despite the origins. It's likely to fare nicely (and) we have high hopes it will be an economic engine for the world over the coming year," he said.
Economist forecasts for GDP growth in China ranged between 8% and 9%, compared with 6.1% growth in 2019, according to the World Bank. That compares with projected U.S. GDP growth of between 3% and 4%.
Emerging markets gained 18.5% in 2020, compared with 16.53% for the MSCI World index. In 2019, the MSCI Emerging Markets index gained 18.82% while the MSCI World index gained 28.44%.
Union Investment Gmbh is "positive on Asia in general," said Michael Herzum, head of multiasset strategy in Frankfurt. It's "mainly a China story, but also because we think (most Asian countries) are doing quite well in terms of controlling the virus." The firm ran a total €19.3 billion ($23.7 billion) in emerging markets assets as of Dec. 31.
China and Asian equities are also favored by money manager Ninety One U.K. Ltd., said Sahil Mahtani, strategist in London. Valuations in these markets "remain attractive and secular-growth prospects strong. Ex-China Asia and broader emerging market equities are particularly well placed to enjoy a stronger cyclical bounce in the coming months, and to potentially benefit from the constructive backdrop of helpful financial conditions, positive flows driven by improved investor risk appetite and, for some, stronger commodity prices."
However, those focusing on the longer term "should still favor Asian stocks that are well aligned with the key regional growth themes over broader emerging market exposure," Mr. Mahtani said. Ninety One's emerging markets AUM accounted for 58% of its £119 billion ($153 billion) in total assets as of Sept. 30.
However, Union's Mr. Herzum thinks the coronavirus will be a structural headwind for Latin American countries and is less optimistic on the region. "It was a cyclical blow for them but also structural," he said.
There's also the continuing theme of deglobalization, which Mr. Herzum thinks will gain momentum and shift production closer to countries near to the U.S. That will probably benefit Mexico while some Latin America countries "will probably lose market share."
However, executives agreed that 2021 will be a better year for emerging markets — not just China.
"The stars are aligned for emerging markets assets to perform strongly," said David Riley, London-based chief investment strategist at BlueBay Asset Management LLP. One reason is that Donald Trump "leaving the White House is unambiguously positive for emerging markets — we shouldn't underestimate (the impact of the messages) from his Twitter feed — that did weigh on emerging markets because of the tie with China and global trade," Mr. Riley said. BlueBay has more than $10 billion in emerging markets debt AUM.
India will also be a bright spot in 2021, "but only because it suffered so much in 2020. What goes down must come up," Mr. Lascelles said.
"From the RBC side, we're happy to be overweight emerging market equities right now. From a risk perspective, valuations and a relative resiliency perspective, it is an attractive market right now," he said. RBC GAM had $13.6 billion in emerging markets AUM as of Sept. 30.
And BlueBay's Mr. Riley said there's plenty of room for investors, which the firm thinks are underpositioned right now, to get a piece of the emerging markets action. "We do think (we're) in a world where you're having a global synchronized recovery, weaker dollar, easy Fed, less headline risk coming out of the White House and attractive valuations; that lines up to where we think emerging markets should do well. We've been increasing to more significant overweight positions in emerging market currencies and local bonds to reflect that view," Mr. Riley said.