Which Emerging Markets Could Outperform in 2021?

A world map, with each country looking like its flag

While the emerging markets' performance next year could turn out to be a bit of a mixed bag, that likely will not be the case for China. Northern Trust projects its 2021 economic growth will hit 8%.

Overall, Northern Trust's outlook for emerging markets next year is positive in the aggregate, with EM equities expected to have a 7.9% return, largely due to China.

The asset manager says that "emerging markets valuations are attractive, and emerging countries have a better handle on the pandemic."

At the same time, tough, "they may face headwinds related to China's alienation, as China and broader Asia represent 40% and 80% of emerging market equities, respectively," according to Northern Trust. "President-elect Biden's approach to the U.S.-China relationship will be key."

In its 2021 outlook, JPMorgan also is bullish on emerging equities, stating that "technology is a big part of the EM story."

Today, the tech sector accounts for nearly 20% of the MSCI EM Index, which is up from just 10% in 2007, "when the commodities sector (energy and materials) represented nearly a third of the index," says JPMorgan.

"And as the index continues to shift away from volatile commodity revenue streams, investors could be willing to pay higher valuations for more stable tech company earnings," the bank adds.

More Views on China, Other Countries

Morningstar's James Gard notes in a recent blog that China should continue to improve its performance. That development could build on the 30.28% returns for China in U.S. dollars through Nov. 25, 2020 (and 23.07% in the local currency, the renimbi).

The worst performers in 2020 were Brazil at -29.82% in U.S. dollars (-3.34% in the local currency), Russia at -21.54% (-1.99% in the local currency) and Mexico at -7.21% (-0.5% in the local currency). India was up 6.19% in U.S. dollars through Nov. 25 (and 10.98% in the local currency).

But India has entered a recession, its first time in history, according to JPMorgan, which adds that "its structural reform process has also lost momentum, leaving the economy less open and flexible today than expected."

However, India still has a bright long-term future due to its "young and growing population, and the rapidly improving education and skill level of its human capital," the bank says.

JPMorgan also points out that Russia's slowness in preparing for peak oil as well as its lack of acceptance of a low-carbon world could mean a reduction in economic growth by 6.5% over the next 30-40 years.

Other Trends

Two other areas investors should watch that should impact emerging markets in 2021 are the growth of digital payments and a weaker U.S. dollar, according to the Capital Group's American Funds research team.

The pandemic has led to the increased use of digital payments, with the dominant players being China's Alipay (part of Ant Financial) and Tenpay (run by Tencent).

Other stocks to watch include China's Yeahka and Brazil's PagSeguro and StoneCo, which offer mobile payment platforms for merchants, Capital Group states.

Another reason to look outside the United States, the investment firm says, is the weakening dollar.

"That's largely due to investor worries about ballooning U.S. government debt, near-zero interest rates and a muddled economic picture," the report explains.

"Timing the exact start of a currency cycle is notoriously difficult, but if this declining dollar trend continues it could provide a nice tailwind for international and emerging markets equities. Likewise, global bond sectors, such as emerging markets debt, could become more attractive," says American Funds.

Nuveen's investment outlook has a similar viewpoint. "The weaker U.S. dollar, which we expect to fall further as the U.S. passes more stimulus and the Biden trade policy comes into focus, should support emerging markets fixed income, including both U.S. dollar and local-currency bonds," it states.

But stimulus won't last forever, Allianz noted in its outlook, stating, for example, "there is a limit to how low interest rates may go, given concerns about inflation, exchange rates and financial stability.

"Indeed, Turkey and Hungary already increased their policy rates in 2020. And fiscal stimulus measures — including increased spending — may soon become simultaneously less effective and increasingly scrutinized as investors assess whether too much spending hurts creditworthiness," adds Allianz.

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