Emerging markets are bouncing back

Investors in emerging markets are finishing the year on a profitable note, but few would have predicted that back in March. The MSCI Emerging Markets index plunged by a stomach-churning 33% between 1 January and 23 March as economies locked down in response to Covid-19. That was then followed by a 68% rally, leaving the index up by 13% for the year as of mid-December, virtually the same as the average gain for all world markets. Emerging market shares are now trading at the same level as they were in January 2018 in US dollar terms. The rest of that year was a washout, but gains over the last two years have finally erased the losses of 2018.

There were significant differences in performance between emerging markets, a capacious and unwieldy category that includes everything from kleptocratic commodity exporters to Asian manufacturing tigers. Latin America disappointed, with both Brazil’s Ibovespa and Mexico’s IPC indices essentially flat over the year. Chile’s IPSA index is down 15% in a year that saw voters approve plans to re-write the constitution.

Argentina’s Merval index shrugged off a government bond default to rocket 27%, but the benefit to most investors will be limited: the country makes up a negligible percentage of the main MSCI indices and was almost booted from the emerging markets index again this year owing to its capital controls. Russian stocks soared 39% in 2019, but had a more muted 2020, rising 6%. The market slumped on this year’s weak oil prices, but has roared back since November as Brent crude returned to $50 a barrel.

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Investors look east

This has been a difficult year in most emerging markets, says Mary McDougall in Investors Chronicle. Many have struggled to contain the virus and contended with lower tourism receipts and weak oil prices. But you wouldn’t think that looking at the index, which is heavily weighted towards east Asia: China, Taiwan and South Korea collectively account for almost two-thirds of the MSCI Emerging Markets index. Their strong performance has dwarfed disappointments elsewhere.

Korea’s Kospi index registered a 27% gain thanks to a robust response to Covid-19 and a global manufacturing upswing in the summer and autumn. Many wonder if South Korea should be classified as an emerging market at all, says Tom Sieber in Shares magazine. While the MSCI Emerging index includes it, the alternative FTSE Russell has considered it a developed market since 2009. The home of Samsung is clearly a developed economy (its GDP per capita is comparable to that of Spain), but restrictions on currency conversion and some financial products mean its stockmarket is judged to fall just short of the “developed market” standard for now.

Other Asian manufacturing economies have had a similarly buoyant year. China’s CSI 300 index is up 20% for the year-to-date, with Taiwan’s TAIEX up 17.5%. Vietnam’s VN-index has advanced 11% this year. India has not coped as well with the virus as its east Asian peers, but its BSE Sensex is still finishing the year up by a profitable 13.5%.

Not all Asian markets were so happy. A year of civil unrest in Thailand saw the local SET index fall by 7%. Hong Kong’s Hang Seng is down 7% after a turbulent year for the city, despite a string of high-profile flotations.

Inflows hit seven-year high

Hopes of a global upswing have seen foreign investors rush into emerging markets this quarter, which look set to see the biggest quarterly inflows in seven years, says Jonathan Wheatley in the Financial Times. Some fear things are getting overheated, but emerging markets should benefit from several tailwinds: stronger commodity prices, recovering tourism, a weaker dollar and loose monetary policy that forces investors to go hunting for returns. Next year “could be a breakout year for emerging markets”, says Christopher White of Somerset Capital Manageme