Emerging markets are bouncing back

The MSCI Emerging Markets index plunged by 33% between 1 January and 23 March as economies locked down. But it has since rallied by 68%.

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.  

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

Recommended

Sterling crashes to its lowest since 1985 after mini-Budget
Currencies

Sterling crashes to its lowest since 1985 after mini-Budget

The pound has fallen hard and is heading towards parity with the US dollar. Saloni Sardana explains why, and what it means for the UK, for markets and…
23 Sep 2022
Earn 3.7% from the best savings accounts
Savings

Earn 3.7% from the best savings accounts

With inflation topping 10%, your savings won't keep pace with the rising cost of living. But you can at least slow the rate at which your money is los…
23 Sep 2022
Three top-notch Asian stocks to buy
Share tips

Three top-notch Asian stocks to buy

Professional investors Adrian Lim and Pruksa Iamthongthong, managers of the Asia Dragon Trust, pick three of their favourite Asian stocks to buy now.
23 Sep 2022
How to use Section 75 credit card protection for your purchases
Credit cards

How to use Section 75 credit card protection for your purchases

Your credit card can give you extra protection when the goods or services you purchase fall short of your expectations. Ruth Jackson-Kirby explains ho…
23 Sep 2022

Most Popular

Paypal, bitcoin, and the weaponisation of money
Bitcoin & crypto

Paypal, bitcoin, and the weaponisation of money

Recent events have shown how both business and governments can “weaponise” money and shut down dissent. What to do? Buy bitcoin, says Dominic Frisby.
22 Sep 2022
Why we should abolish stamp duty – the worst tax in Britain
Tax

Why we should abolish stamp duty – the worst tax in Britain

Stamp duty is Britain’s most horrible tax. We should forget cutting it and abolish it altogether, says Merryn Somerset Webb.
22 Sep 2022
What we know and what to expect from Kwasi Kwarteng's mini-Budget
Budget

What we know and what to expect from Kwasi Kwarteng's mini-Budget

New chancellor Kwasi Kwarteng is to deliver a “mini-Budget”. Nicole García Mérida explains what we can expect to see.
22 Sep 2022