Global Challenges in Emerging Markets

Virtual Event Replay “Global Challenges in Emerging Markets” with Axel Schwarzer and Lord Jim O’Neill

Axel Schwarzer, Head of Vontobel Asset Management, highlights the results of our recent survey on emerging markets.

Our research shows that investors plan to significantly increase their exposure to emerging markets over the next five years, in both fixed income and equities. But many investors worry about volatility and macroeconomic challenges, and the pandemic has increased risk aversion across the board. How will investors manage these fears to seek the additional returns and diversification benefits that emerging markets could give them?

Lord Jim O’Neill, the British economist who coined the term BRICs, explores challenges in emerging markets and finds reasons for optimism, including improved economic growth and promising cyclical drivers.

After the impressive equity rally this year, downside volatility has crept back into the markets. This is due to the pause in development of a Covid-19 vaccine against a historically weak month for stocks.

Notwithstanding the extremely unpredictable environment that is bound to persist, there are many forces that should favor emerging markets.

Growth has rebounded since the dark days of March given easy monetary policy and fiscal stimulus. Moreover, the Fed’s important inflation-friendly shift is especially supportive of risk assets, including emerging markets.

Key Cyclical Indicators Support EM

It may come as a surprise to many investors that key cyclical indicators – such as the Global Purchasing Managers' Index (PMI) – feature a V-shaped recovery this year. Importantly, China’s (non-manufacturing) PMI not only recovered from its lows, but has now exceeded levels reached during the past few years.

Indeed, China is poised to be the world’s largest source of consumption at the margin going forward. This has important consequences for all economies and markets, especially those that relate to China's consumers.

Given that China and other North Asian countries have managed to control Covid-19 better than many Western countries, consumption patterns are likely to maintain improvements in the region, boosting prospects for emerging markets in the near term.

Favorable Growth Trends

Contrary to what many people realize – and despite all the angst and social concerns about the state of the world – global GDP growth has been historically strong. Even though growth slowed during the past decade, economic output is currently healthier than it was in the 1980s and 1990s.

Of course, global growth has been largely driven by China and the rest of the BRICs. During this period, China has been the only BRIC country to achieve its growth potential. And even as the overall pace of growth slows, its contribution to global GDP continues to rise.

But China is not alone – India will also be an important contributor to global GDP during the next 20 years and beyond. The two most important factors that fuel economic growth are typically productivity rates and the number of people employed. The sheer size and potential of these two most populated countries make them hard to ignore. And while there is no direct correlation between GDP and equity performance, growth (and valuations) are powerful determinants for potential market outcomes.

Among the larger emerging markets, South Korea also warrants attention. The country has generally coped well during the pandemic. Interestingly, South Korea is the only country of more than 50 million people whose average wealth has risen from that of an African country to that of a European G7 country, such as Spain.

To be sure, global markets remain fragile despite improved economic growth and investor sentiment. However, attractive valuations, easy monetary policy, government stimulus and promising cyclical drivers suggest that this is indeed a good time to increase exposure to emerging markets.