Rediscovering the Appeal of Emerging Market Equities

Emerging-market (EM) stocks, often considered risky in a crisis, rebounded in 2020 even as the COVID-19 pandemic spread globally. As vaccines and other favorable conditions unfold, investors have good reasons to consider EM equities in 2021 while strategically considering their potential risks.

Emerging-market (EM) stocks were largely shunned as the COVID-19 crisis took hold, but they’re starting to attract more attention. After suffering since March, net flows into EM equity strategies have rebounded and turned positive in the fourth quarter. And in 2020, the MSCI Emerging Markets Index rose by 19.1% in local currency terms, outpacing developed-market (DM) stocks (Display).

2020 returns in local currency terms for the MSCI Emerging Markets Index and MSCI World Index was 19.1% and 13.5%, respectively.

Despite the recovery, many investors still aren’t convinced about EM stocks amid persistent uncertainty over the pandemic in key regions. But EM equity returns have held up well the last two years, reflecting solid fundamentals, valuations and economic factors. Add to this the promise of COVID-19 vaccines, and we think it’s easier for fence-sitters to see the merits of EM’s long-term potential.

EM’s Challenging Three-Year Journey Turns a Corner

EM stocks had been out of favor long before COVID-19. They rallied in 2016 and through most of 2017, only to suffer a triple blow from intensified US-China trade tensions, a costly technology war and the global pandemic. In 2020, all countries reeled, with India’s GDP estimated to have contracted by nearly 11%, making it one of the world’s worst-performing economies, according to AB’s economists. As conditions and economic outlooks improve, however, we expect these headwinds to wane—along with other positive developments—in 2021. In fact, we estimate that India GDP could grow 9%, and China 8%, in 2021—well above their averages over the last decade.