Why emerging markets are ahead in the growth, inflation and stimulus paradox
The valuation discount for emerging vs. developed markets is at its widest in 15 years, but with much of the bad news already priced in.
Nov 23, 2021
Portfolio Managers Grant Webster and Archie Hart assess the outlook for emerging markets in 2022.
As we headed towards the end of 2020, emerging market (EM) economies were braced for a difficult period ahead. Economists expected EMs to run significant output gaps as they bore the brunt of the COVID-19 devastation, which wrought havoc across supply chains and left many countries running at well below capacity. The anticipated recovery was expected to take years, with fiscal spending constrained by elevated deficits and the uneven roll out of vaccine programmes disproportionately impacting developing countries, making them vulnerable to further waves of the virus.
However, for all this doom and gloom, a healthier reality emerged as EM economies fared much better than expected. As Figure 1 illustrates, revisions to growth forecasts revealed that the pandemic was less damaging to EM economies in 2020 than previously thought, while growth in 2021 has been stronger than expected. Strong demand from developed markets (DMs) for both goods and commodities has meant that EMs have experienced a robust terms-of-trade improvement, leading to healthier current accounts, while fiscal revenues have also been stronger than expected, which has given governments (and markets) much-needed breathing room. Meanwhile, the allocation of special drawing rights from the IMF has substantially alleviated the funding requirements for many smaller, frontier markets.
Figure 1: EMs have emerged in a far healthier condition than was initially feared
Source: IMF World Economic Outlook (October 2020 and October 2021), Ninety One calculations.
Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
With Western central-bank policy normalising, economic growth rates diverging and global trade still readjusting to life after lockdown, investors have a complex environment to navigate in 2022.
Ninety One’s portfolio managers assess the outlook across their asset classes and regions.
Our team also takes a deep dive into the outlook for emerging markets, as well as into how sustainability will drive investment outcomes next year and beyond.