Look to emerging markets for higher returns
For investors in search of resilient returns after a year of instability, there are several reasons to look to emerging markets.
Firstly, key emerging markets, particularly in East Asia, have been highly effective in managing the Covid-19 pandemic. Their health outcomes, economic resilience, and equity market performance have proved drastically superior to much of the West. Control of the virus in East Asia has enabled broader economic recovery and earnings visibility, giving markets confidence. In this context, the region remains well placed to lead global markets.
Aside from how well some emerging markets contained Covid-19, these countries also have some fundamental qualities that make them an exciting prospect for long-term investors facing a world changed by the pandemic.
Emerging markets are at the forefront of technological innovation. Their very nature has moved away from an old-economy model that relies on materials, energy, and industrials. In its place is a new economy fuelled by technology, communication services, and the consumer. Asia is home to a variety of tech-related giants that stand to benefit from structural trends which have been reinforced by the pandemic.
In addition, growing middle-class populations with more spending power are providing a significant opportunity from a consumer penetration and premiumisation perspective. Many Chinese consumers are looking to spend their money on better things, experiences, products, and services. This trend will continue to drive demand for trusted brands and value-for-money products, and in turn help stimulate economic growth.
With an economic recovery unfolding across most emerging markets, led predominantly by East Asia, this should lead to more growth prospects. And even the laggards over 2020 such as India and Brazil stand to benefit from a uniquely accommodative environment of negative real rates, ongoing reform efforts, and excess capacity in their economies to support growth.
Lastly, emerging markets proved more resilient than the developed world in 2020 from a stock performance perspective. The MSCI Emerging Markets Index was largely flat, returning -0.11 per cent from 2019 to 2020, compared with an 11.77 per cent fall in the MSCI World Index. This is reflective of the fact that many companies, particularly those in East Asia, successfully executed during the pandemic and should emerge from the crisis in a stronger competitive position. Nonetheless EM equities continue to trade at a discount to developed markets, and what has in the past arguably been a discount due to higher risks looks questionable after the 2020 Covid-19 debacle in the West.
These factors should continue to drive improved earnings visibility for emerging markets into 2021. For so many different markets across this landscape to concurrently offer compelling investment potential, individually and in aggregate, presents an unusual investment window. Investment opportunities outside of the UK are broad and diverse. For the long-term investor, considering emerging markets as part of a well-diversified portfolio could indeed help those looking to claw back their losses after a tumultuous year.
Andrew Ness, Portfolio Manager, Templeton Emerging Markets Investment Trust (TEMIT)