Anticipation in emerging markets due to a potential weakening of the U.S. dollar
After a decade of lagging behind developed markets, emerging markets (EMs) are making a comeback in 2021, with certain regions showing exceptional growth. This resurgence can be attributed to geopolitical and trade shifts, as well as investor concerns about China and other EM countries.
Political and regulatory risks, structural shifts in the global economy, and geopolitical tensions have long been obstacles for EMs. However, the re-election of Donald Trump in recent years and subsequent changes in US policies have benefited certain EM regions, particularly Latin America. Brazil, for instance, has seen a significant improvement, despite a decline in sterling terms due to the slump in the real, with the market up by 13% this year.
Meanwhile, emerging markets excluding China have shown significant outperformance. Strong performers in this category include India, Taiwan, South Korea, Brazil, South Africa, and Mexico, all of which have attracted inflows from investors. India's stock market, for example, has returned 19% this year, while Mexico's has risen 32%.
One standout performer in the EMs has been Taiwan, primarily due to the performance of chipmaker TSMC. The Taiwanese stock market has risen by 41% this year, with TSMC accounting for half the index and rising 75%. However, most funds investing in Taiwan have underperformed due to their inability to cap their exposure to a single stock like TSMC.
In contrast, South Korea had a poor year, with a decrease of 12.5% and 21% in sterling terms. Samsung Electronics, which makes up a quarter of South Korea's index, has slumped 30% this year.
Despite these variations, EMs as a whole have performed well. The MSCI Emerging Markets index is up by 13% this year, while the MSCI World ex USA is up by 11%. Notably, the MSCI World is up by 22% this year, suggesting that if US stocks overheat, EMs could be the obvious contrarian value play.
Another interesting development is the rise of Singapore, with internet group Sea, headquartered in Singapore but listed in New York, rallying 200%. This highlights the increasing importance of Singapore as a hub for tech companies and the potential for further growth in the region.
In conclusion, the trend suggests a potential rebalancing and renewed attractiveness of emerging markets beyond China, with investors paying more attention to geopolitical and regulatory environments in their allocations. As EMs continue to navigate political and economic challenges, they are poised to offer attractive investment opportunities for those willing to look beyond traditional developed markets.
Investors are increasingly attracted to emerging markets (EMs) like India, Brazil, South Africa, Mexico, and Taiwan, as they have shown significant outperformance compared to the past decade. For instance, India's stock market has returned 19% this year, while Mexico's has risen 32%. This economic resurgence in EMs can potentially lead to appealing investment opportunities, as stated in the geopolitical and regulatory environments, especially concerning changes in US policies that have benefited certain EM regions. Furthermore, the rise in interest rates, influenced by fluctuating economic performance and political factors, plays a significant role in financing and investing decisions within these markets.
