Green light for the emerging markets

First, he points out that the economic normalization will be related to the vaccines widespread distribution in emerging markets. “Vaccines will take time to be distributed in certain emerging markets, and therefore forecast risk will persist into 2021. We nevertheless expect to have a full normalization by 2022”.

Rebalancing

The dollar will once again play an important role going forward, and a sustained period of weakness for the US currency will benefit to the EM nominal growth, and therefore support the relative equity market performance for the asset class. “We expect another decent year for the Chinese growth, but part of the recovery has been driven by an ongoing uplift in credit impulse, which may be peaking at the moment. This will be impacting the EM economic activity and commodity prices with a six month lag and could therefore offset some of the positive impact we expect from the normalization”.

Thomas Wilson reminds that after the March collapse, the market performance was very strong in the North Asian economies, driven by big technology names and by a very efficient control of the epidemic. Later in the year, the weaker markets were lifted by the weak dollar and by the rebound on several commodity markets. “This kicked off a rotation from structural growth towards cheap cyclical names that will benefit from economic rebound. During the second half of 2020, we accordingly took profits on some of the structural growth names, while raising our exposure on quality cyclical stocks”.

Positive on growth

At the current moment, he remains positive on the emerging markets, despite the fact that some structural growth names are looking really quite expensive. “The excessive cheapness on some emerging markets has disappeared, but we do expect the economic normalization to support this asset class at least until 2022”. He also points out that the slow distribution of vaccines in some areas means that volatility will remain supported.

 Thomas Wilson is underweight on China and Asia. “We think the Chinese growth will be really pretty decent this year, but from a market standpoint, if you are looking for cyclical names, you can find better quality at a better price outside of China, and probably with better earnings rebound stories”. He is also overweight on markets like South Africa and Brazil. “These are both classic recovery plays, with cheap domestic equities and cheap currencies. Both of these economies suffered markedly as a result of the Covid-19 epidemic, with deteriorating debt to GDP levels. They should see an uplift in valuations with the economic rebound coming through”.

Regarding the technology sector, Thomas Wilson signals that some areas are actually still quite interesting, while others (e-commerce) have rerated very aggressively. “It is hard to avoid completely the new economy names, since they have really good medium term runways to growth, but we scaled back our exposure on some names. We happen to have a heavy overweight on memory stocks because the demand is going to remain very strong going forward. And we also like semiconductor names”. Overall, he points out that he remains balanced between structural growth stocks and more cyclical names, keeping the aim to remain exposed on quality names on his entire investment universe.

 

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