Emerging market equities poised for growth

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December 8, 2020
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MEDIA RELEASE: Technology-savvy consumers in economies that have reopened and are in post COVID-19 recovery phase, namely China, Taiwan and South Korea, are fuelling a revival within emerging market equities, according to American Century Investments’ senior portfolio manager, Patricia Ribeiro.  

“Young, fast-growing populations are about to become middle class consumers. COVID-19 has spawned a genuine stay at home culture, whether it be remote learning, virtual medical visits, working and shopping from home. And there’s a huge opportunity for investors to capitalise on this structural shift. 

“Emerging market economies represent 80 percent of the world’s population, making younger, connected consumers key to domestic demand. Investment inflows are now starting to reflect this trend,” she said.

Ms Ribeiro believes China has arguably had the best response to the pandemic, with domestic activity already normalising. 

“China has left behind the worst of its COVID-related impacts and is well ahead of other jurisdictions, both in emerging and non-emerging economies.

“From an equity perspective, that’s leading to increased production, manufacturing and consumption – and earnings growth has recovered in response. The prospect of a recovery in emerging market equities is quite compelling, particularly in an economy like China’s,” she said.

According to FactSet, the second quarter of 2020 proved to be the best performing quarter for emerging market equities in more than a decade, with the MSCI Emerging Markets Index up another ten per cent in the third quarter (as of Oct. 2020). 

“We believe this momentum is set to continue as investor sentiment improves. When combined with extraordinary fiscal and monetary stimulus from global central banks in response to COVID, global liquidity could potentially sustain – if not lift – emerging market equities even further,” she said.

According to Ms Ribeiro, valuations in the asset class – compared to developed markets – also continue to trade at a discount to historical averages. On average, emerging market equities trade at a 20 per cent discount to the S&P, but is currently trading close to a 30 per cent discount, even after the strong rally of the last two quarters as of Oct. 2020. (FactSet)

“Strong headwinds do still remain, and while China’s domestic activities have normalised, caution is still required, particularly until such time as the virus is fully contained.

“Ultimately, however, the sheer volume of emerging market consumers now shopping, working and schooling online, means investors are increasingly considering the merits of emerging market equities,” she said.