Why we are bullish on emerging market equities in 2021

Emerging market equities have outperformed developed equities by 10.5% since late June as sentiment has changed to the stance that the main emerging market indices (China, Taiwan, South Korea and India) will come out stronger as this part of the world has managed the pandemic much better than many developed market countries. The relative performance between emerging markets and developed markets also suggest that this a mean-reversion trade as emerging markets have underperformed for years as investors have focused on US technology and health care stocks.

One of the main reasons behind our positive view is that we guess China will ease its financial conditions through easier monetary policy. In many ways, China is running too tight financial conditions which have consistently strengthened the currency against the USD, but the length of these tighter conditions are now becoming an issue for export growth and the parts of the economy related to real estate. We expect China to ease monetary policy in 2021 which could lift equities through expanding valuation multiples.

Our other argument for being long emerging markets is that Chinese stimulus and a better positioned Asian economy will lift earnings considerably from current low levels. Analysts expect earnings to increase by 43% over the next 12 months which will likely create a lot of positive tailwind from earnings exceeding expectations and growing fast on a y/y basis which tend to lift sentiment. Analysts also discount 11-15% earnings growth in the years after 2021 which should also materialize in higher equity prices as investors will continue to look for growth.