Perspective

Why we believe stars are aligning for emerging markets in 2021


After a year of surprises that 2020 had brought upon us, the prospect looks to be much brighter in 2021.

Before Covid-19, the global economy was experiencing a stable recovery albeit in its nascent stage. We were of the view that 2020 was going to be a year where risk assets could perform barring any unforeseen events. Then Covid-19 arrived with unprecedented implications and completely caught everyone off guard.

While some of the secular themes (such as continuous technology advancement and healthcare needs) were already developing, it was Covid-19 that polarized investment themes significantly. Technology stocks have since been driven to be the front and centre of the financial market outperformance.

With vaccines now kicked in, recovery has been brought to the fore, and the hard-hit emerging markets seem to be poised to benefit from it. 

Opportunities in EM multi-assets are on the rise

The massive stimulus, weak dollar, cheaper valuation, strong industry recovery, technology cycle restocking, economy reopening with benign inflation, and abating acute political tension between China and US, all indicate that stars are aligning for emerging market multi-asset investment opportunities.

Apart from the macro factors shaping the investment thesis for emerging markets strongly, EMs have also started to enjoy stronger external positions over the years. With better current account surplus and higher foreign reserves, EMs are also better placed to absorb potential volatility should rates or yields rise from here sharply (which is not our base case anyways).

With such backdrops, we expect emerging market assets to enjoy a bright 2021 and beyond. We believe the good way to capture overall emerging market opportunity is through a multi-asset total return approach with an income feature. While managing various risks and downside, it provides total return and income, as well as stability as it dampens volatility.

Holding dear to security selection, our allocation to Asian equities has successfully helped our overall performance in 2020.  Besides, we have tactically deployed EM preferred shares and convertible bonds during the year. By leveraging their asymmetric return and risk profiles, we were able to provide necessary protection with still upside potentials.

Our core exposure to companies with high quality balance sheets that generate stable, recurring cash flows, continues to prevail, alongside more cyclical positions in regions that are set to benefit from a recovery in global trade. These include Asia, as well as select Latin America and Eastern Europe countries.  Currency is also a tool for us to actively hedge risks besides bonds.

What are the biggest risks for 2021?

In our views, vaccines fail and taper tantrum déjà vu are two risk scenarios that are of low probability as we see it now. Even so, its impact on the markets if and when it happens can be negative.  Nevertheless, EM has gone a long way with much healthier financial conditions now than before.  And this is exactly why multi-asset income approach can materialize the EM asset opportunity set with very attractive risk-adjusted results as we have achieved.

What history can really teach us? Looking back in 2020, one of the biggest challenges we faced during the pandemic was how quickly markets could respond to uncertainty in a panic mode, which imposed investment and operational challenges. All in all, multi-asset strategy is a solution that not only helps investors navigate the extreme market volatilities nimbly but also proven its ability to achieve strong results across normal and tumultuous times.

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