• Equities
  • Emerging Markets
  • Emerging Market Equity

Selectivity, sanctions and decarbonisation: The outlook for emerging market equities in 2021

Alistair Way, head of emerging market equities at Aviva Investors, looks at three themes that will shape the asset class in 2021.

Selectivity, sanctions and decarbonisation: The outlook for emerging market equities in 2021

1. As economies begin to recover and markets normalise in the wake of the COVID-19 pandemic, top-down thematic trends will give way to a more diverse range of performance drivers. Stock selection will become more important for investors in EM equities.

Global emerging market equities have proven relatively resilient through the turmoil of 2020. In dollar terms, the MSCI Emerging Markets Index returned 1.15 per cent over the year to October 30, outperforming both the MSCI World Index (-0.98 per cent) and the MSCI All Country World Index (-0.68 per cent). But these figures mask some important nuances.

Growth has come mostly from internet and broader technology stocks

As with developed markets, EM equity performance this year has been driven by a handful of stocks in a handful of sectors in a handful of countries. Growth has come mostly from internet and broader technology stocks in the larger, richer emerging economies: China, South Korea and Taiwan.

Many investors have understandably sought to navigate the market chaos of 2020 by allocating capital based on top-down thematic trends, principally the global rise in demand for digital platforms during lockdowns. This has benefited companies in communications software, gaming and e-payments, among others. One indicator of this trend is that China’s tech-focused equity index, the ChiNext, rose an astonishing 50 per cent in the year to October 30.1

But as COVID-19 vaccines are rolled out and economies recover, we expect to see less emphasis on thematic trends and a more diverse range of performance drivers return in 2021. As economies will recover at different speeds, investors will need to monitor the state of the pandemic and policy responses in each country to properly assess potential opportunities. This environment should favour investors willing to go off the beaten track and undertake bottom-up due diligence on companies in previously overlooked markets. Opportunities may arise in South Asia and the frontier markets of sub-Saharan Africa, which have thus far weathered the pandemic better than expected.

2. The trade war will persist and globalisation will continue to unwind. Sanctions-hit companies will suffer; others could seize the opportunity to build market share.

A new US administration under President-elect Joe Biden is unlikely to bring an end to the US-China trade war. While Biden can be expected to seek a more rational, measured and multilateral approach to containing China than his predecessor, President Trump, tensions between the two global powers are likely to continue. There is even a risk Trump may take the opportunity to enact hawkish anti-China legislation during his remaining time in office, making it difficult for Biden to deescalate the conflict early in his term without looking weak.

China is aware it needs to accelerate efforts to achieve self-sufficiency in chip-making and other vital technologies

Against this backdrop, China is aware it needs to accelerate efforts to achieve self-sufficiency in chip-making and other vital technologies. The government will continue to offer subsidies to homegrown players. Meanwhile, smartphone maker Huawei has been badly damaged by restrictions on its access to American-made semiconductors, which constrain its ability to build competitive handsets. It has already started to lose customers domestically and will face further challenges in 2021.

By contrast, some other emerging market companies have proven they are able to adapt to the shifting geopolitical landscape and build market share as their peers are hit by sanctions: Korean electronics giant Samsung and Taiwan-based chipmaker TSMC managed this impressively in 2020.

3. China’s decarbonisation push will benefit the renewable-energy and EV sectors, both domestically and in neighbouring markets.

In September 2020, Chinese President Xi Jinping announced a set of ambitious climate targets: he pledged China would hit “peak carbon” in 2030 and cut emissions to near-zero by 2060. To meet these objectives, China will need to rapidly phase out coal-generating power plants and build renewable-energy infrastructure.

The decarbonisation effort is likely to accelerate demand for EVs in China

This policy programme should benefit a wide range of Chinese firms, including solar-glass manufacturers, onshore wind-farm operators and gas distribution companies. The decarbonisation effort is also likely to accelerate demand for electric vehicles (EVs) in China.

Equity valuations among many emerging market EV brands already look excessively high, but the knock-on effect on industries further down the supply chain, such as battery materials manufacturers, could generate attractive opportunities in China and other major emerging markets, notably South Korea.

In summary

Macro themes, such as the trade war and the battle against climate change, will continue to shape the EM landscape in 2021. But as the global economy begins to normalise in the wake of the COVID-19 pandemic, investors will also need to attend carefully to the differences between emerging markets and the dynamics of individual economies and companies.

To capture the full range of opportunities, investors should look across the EM spectrum and focus on fundamental valuation considerations. Careful due diligence and disciplined stock selection will be crucial.

Reference

  1. Eikon Datastream

Want more content like this?

Sign up to receive our AIQ thought leadership content.

Please enable javascript in your browser in order to see this content.

I acknowledge that I qualify as a professional client or institutional/qualified investor. By submitting these details, I confirm that I would like to receive thought leadership email updates from Aviva Investors, in addition to any other email subscription I may have with Aviva Investors. You can unsubscribe or tailor your email preferences at any time.

For more information, please visit our privacy notice.

Related views

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe, this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business address: Level 27, 101 Collins Street, Melbourne, VIC 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom.

Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.