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GW&K Emerging Market Strategies Investment Commentary – 4Q 2020

Emerging market (EM) equities posted a stellar return of +19.7% in the fourth quarter, reflecting growing confidence that the global economy would experience a robust economic recovery in 2021. The fourth-quarter surge left the MSCI Emerging Markets Index with a gain of +18.3% for 2020 compared to a +15.9% gain for the MSCI World Index of developed market (DM) equities. A basket of EM currencies gained nearly 4% against the U.S. dollar in the fourth quarter, led by Latin American currencies which advanced +11% for the quarter. The slide in the U.S. dollar also helped boost commodity prices, with the CRB U.S. Spot Raw Industrials Index gaining +11% in the fourth quarter, while the WTI Crude Oil price gained +21% over the same period.

The most significant news event in the quarter was the announcement in early November of several highly effective vaccines with the potential to end the pandemic. That helped market participants shrug off concerns about near-term economic risks associated with accelerating coronavirus infections in Europe, Japan, South Korea and the U.S. The U.S. election result also raised hopes that the incoming Biden administration would help reduce global trade tensions, as did a last-minute deal over Brexit between the European Union and the U.K.

The vaccine news and political developments came against a backdrop of highly expansive monetary and fiscal policies adopted by many leading DM and EM nations. According to Bank of America Global Research, a cumulative total of $22 trillion of stimulus measures were announced in 2020, including $14 trillion of fiscal stimulus and 190 rate cuts. Key fiscal policy developments in the quarter included America’s newly enacted $900 billion stimulus package along with the European Union’s $900 billion pandemic relief package that will be financed with jointly issued debt.

The combination of economies emerging from lockdowns and strong economic stimulus measures has delivered a global recovery that appears set to continue in 2021. According to an estimate by economists at J.P. Morgan, the global economy grew at a remarkable +39% annual rate in the third quarter after having contracted at an –18% rate in the previous quarter. On a calendar-year basis, they project global growth of +5.4% in 2021 following a decline of –3.9% in 2020.

EM nations are expected to lead, with growth of +7.1% in 2021 after a modest decline of -1.9% in 2020. The most dynamic growth in 2021 is expected to come from EM Asia, with China projected to grow by +9.2% and India by +12.2%. EM Asia overall is expected to grow +8.5% in 2021 compared to growth of only +3.8% and +3.4%, respectively in the EM regions of Latin America and Europe, the Middle East, and Africa (EMEA).

Asia’s expected growth advantage was reflected in equity market performance in 2020, with EM Asia posting a gain of +28.4% compared to losses of –13.8% and –7.6%, respectively for the EM Latin America and EMEA regions. That said, EM Latin America was a standout performer in the fourth quarter, gaining +34.8%, compared to +18.9% in EM Asia and +14.3% in EMEA. This reflected a general pattern in global markets in the wake of the vaccine news for certain industries, countries, and currencies that had been hit hardest by the pandemic to gain the most on prospects for the pandemic to end.

All EM equity sectors posted gains in the fourth quarter, with some sectors that had lagged earlier like Materials, Financials, Industrials, and Utilities leading with robust gains in the +20% to +30% range. The strongest sector in the fourth quarter was Information Technology, with a +34.2% gain for the quarter and an impressive +60.1% gain for the year. Two of the weakest sectors in the fourth quarter, Energy and Real Estate, were also weakest for the year based on structural headwinds. However, two of the other weakest sectors in the fourth quarter, Communication Services and Consumer Discretionary, were among the top performers for the year, but were buffeted by a shifting regulatory climate in China.

We continue to believe that global economic recovery is the most likely scenario for the next several years, along with a secular decline in the dollar as the U.S. tries to finance massive deficits at near-zero interest rates. If history is any guide, EM equities are well positioned to benefit from both economic recovery and potential dollar weakness.

This represents the views and opinions of GW&K Investment Management and does not constitute investment advice, nor should it be considered predictive of any future market performance. Data is from what we believe to be reliable sources, but it cannot be guaranteed. Opinions expressed are subject to change. Past performance is not indicative of future results.

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