Perfect storm for emerging market equities?

Perfect storm for Emerging Markets?

After the stellar returns in 2020 of US equity markets, we believe investors are starting to look outside of the US equity markets for investment opportunities and we see Emerging Markets (EM) being the clear winner in international markets.

Our favorite areas in the equity markets remain US technology, US small-caps, and industries that will likely benefit from a broad economic recovery (ie. consumer discretionary, travel and leisure, and energy). We began buying EM ETFs in our client portfolios beginning 11 January 2021. 

We strongly favor EM equities over developed international markets, especially UK and Europe for the following reasons:

  • The global shutdowns due to the COVID-19 pandemic have accelerated China’s GDP forecasts. China is now expected to overtake the US in 2028 vs the pre-pandemic forecasts of 2033.
  • China was the only country to post positive GDP for 2020.
  • Electric vehicle push - China produces 65% of all lithium batteries. In comparison, no country produces more than 20% of the world’s oil.
  • Commodity-heavy regions - with a weakening dollar and rising global inflation and interest rates expected over the next 5 years, EM ETFs are seeing record inflows.
  • Asian exports have surged as global supply chains struggle.
  • Even in light of the recent rally, EM equities are still trading at approximately a 20% discount to global equities. 
  • EM earnings growth is expected to exceed that of global equities in both 2021 and 2022.
  • Multi-year resistance breakout of EM ETFs.
  • Potentially easier trade policy with the Biden administration.

We believe there will be a multi-year trend of strong performance in emerging markets equities and recommend a 5-15% allocation in long-term portfolios.

Is a correction in markets coming?

While it is impossible to predict if and when corrections will occur in the markets, we do believe that markets could use a “cool-down”. However, the extent and degree of a sell-off is uncertain. The markets have seemed to trade sideways rather than have a 5-10% correction to start the year. 

We still strongly believe in the near, medium and long-term growth prospects in equity markets, especially US equity markets. The following are all reasons why we believe we are in the early stages of the business cycle and a multi-year bull market.

  • US January retail sales rose strongly driven by stimulus - up 5.3% compared to December.
  • More stimulus to come - $1.9 trillion proposed stimulus bill
  • COVID cases are dropping dramatically in the US
  • Broad reopening to come in the US - potentially seeing the strongest recovery of all time.
  • Pent up demand is real.
  • Most importantly, the Fed is committed to keeping interest rates low for 2-3 years.

If you would like to discuss your portfolio or any of the above, please feel free to schedule a call by clicking here.

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