This report explores the RBC Emerging Markets team's areas of research throughout the year and displays the team's active engagement with companies and their analytical rigor. We hope you enjoy the team's insights for 2021.
The full report covers a vast scope of topics including macro-economics, global policy response, portfolio themes, ESG reforms, sector analysis, and style analysis, with separate segments focusing on China, India, and Latin America.
Below you will see the report highlights. For the full RBC Emerging Markets Equity Outlook 2021, which provides a much more detailed analysis of the topics outlined below, please contact us.
At the beginning of 2020 there was an optimistic outlook for the year's global growth, however the COVID-19 pandemic changed everything. Strict lockdown restrictions and business closures imposed by governments worldwide have caused the sharpest global economic downturn seen in the last half a century. The government support packages in emerging economies have averaged 5% of GDP, compared with 30% of GDP in developed countries. In terms of structure, there has been virtually no quantitative easing in emerging nations, and only a fraction of the fiscal spending seen in the developed world.
The International Monetary Fund expects emerging markets' economic output to fall by 3.3% in 2020, then increase by 6.0% in 2021; this compares favourably to developed markets, where output is expected to drop by 5.8%, before recovering by 3.9%. Consensus expectations are for China to grow in 2020 and to accelerate to 8.0% growth in 2021 which is quite a dramatic recovery for an economy so large. (Exhibit 1)
Exhibit 1: Bloomberg Consensus GDP growth forecasts by EM country
Source: Bloomberg Consensus. Data as at 8 November, 2020.
In terms of currency, we expect EM currencies to appreciate against the U.S. dollar in 2021. EM currencies as a whole remain very cheap relative to the U.S. dollar, and the three largest EM countries — China, Taiwan and South Korea — have positive current account balances and fiscal deficits significantly lower than the U.S.
The extraordinary market conditions in 2020 have made our thematic, long-term approach more relevant than ever. Overall, most trends will likely revert to normal once the coronavirus pandemic has ended, however history has shown that crises can leave enduring effects; we expect to see some permanent shifts as a result of the current crisis. The most notable probable changes include: accelerated technological adoption across a broad range of applications, de-globalisation driven by the re-localisation of supply chains, particularly within food production and technology, and increased automation as a solution to the costs and risks associated with local manufacturing and manual labour.
Sector analysis shows that Consumer sectors remain attractive as we look ahead to 2021 and we are selectively positive on the Information Technology and Healthcare sectors due to valuations. Over the last 12 months we have seen an unprecedented level of divergence within sectors, led by those that are benefitting from COVID-19. Technology has been a key investment area with strong structural tailwinds for some time now, however the effects of COVID-19 have further accelerated the migration towards digital services.
Style analysis indicates that the Growth style is outpacing Value by more than 30%, and is delivering the best outperformance ever, justified by much better earnings growth. Quality, in a risk-off environment, has also outperformed but by a lesser margin. Small Cap stocks have been lagging but have started to perform better as the market rebounded from its March lows. As investors start to look ahead to 2021 there have been some signs that they are interested in quality Value names with a good growth outlook in selected segments such as Banks, Autos or Industrials. However if the pandemic is not controlled, the global economic growth expected for 2021 would have to be downgraded and it is likely that a market sell-off would take place as currently a strong recovery is priced in. In that risk-off environment, high Growth stocks and those benefitting from COVID-19 would resume their outperformance whilst Value and Small Cap stocks could underperform.
In terms of countries, this year's report concentrates on India, China, Mexico and Brazil. We expect India to remain the fastest-growing major EM economy, with growth driven by economic reforms and supportive demographics. Although there are still significant structural challenges, the Indian economy is making progress under Prime Minister Mod and has managed to attract more foreign direct investment and has increased its manufacturing base through the government's 'Make in India' initiative, launched in 2014, and the more recent 'Production-Linked Incentive' scheme for the electronics industry.1 (Exhibit 2)
Exhibit 2: India has been attracting FDI
Source: CEIC, UBS. Data as at October, 2020.
The pandemic has had a severe impact on the Latin American region and its equity markets in 2020 with its two largest equity markets - Brazil and Mexico - underperforming EM equities by 43% and 24% respectively (year-to-date as at 4 November 2020).2 Interestingly, both countries' economic paths and fiscal responses to the pandemic have been quite different: Mexico's limited support package of 1.2% of GDP was the lowest in Latin America, whereas Brazil's government stimulus at 12% of GDP was one of the highest. Mexico witnessed a significant reduction in economic activity followed by a mild recovery while Brazil witnessed a more contained decline in economic activity followed by a more rapid normalisation. Looking ahead to 2021 there is continued concern over the economic outlook, fiscal risks and the uncertain political backdrop.
China appears to have handled the coronavirus crisis successfully by marshalling early and aggressive lockdowns supported by a timely policy mix of tax cuts, government spending stimulus and cheaper credit. After suffering its worst quarterly drop in output since the 1960s from January through to March, the Chinese economy has started to recover without monetising debt. Looking into 2021 and beyond, the key strategic focus of China's current 'Five-Year Plan' offers a glimpse of how the country will tackle two key challenges: declining potential growth and a deteriorating external environment. More importantly, it also sets out the roadmap to become a high income economy. With a broad objective of 'sustained and sound economic growth' in mind, the Chinese government has targeted self-sufficiency particularly in key technological areas, innovation, domestic demand, environmental protection, and new urbanisation.
This year's report also focuses on ESG reforms at a country level with particular attention on China's evolving climate change policies, South Africa's development in terms of gender diversity, and India's improvement in 'ease of doing business'. Reforms continue to be a key long-term driver of growth and of differentiation among EM countries and those that specifically relate to ESG and sustainability will become increasingly important.