Our Opinion: 2022
A year to forget in emerging markets
Last year was one to forget for investors in most emerging markets (EMs). Developing countries’ populations have received far fewer vaccinations than their developed-country peers. Economies are vulnerable to inflation and with government borrowing rising, the asset class is increasingly out of favour with international investors.
At the end of 2021, non-resident financial flows to EM assets excluding China turned negative for the first time since March 2020. Investors’ enthusiasm for emerging markets has dwindled and 2022 may not prove much better. Many emerging markets are caught between a Chinese slowdown on the one hand and tighter US monetary policy on the other. Higher US interest rates strengthen the dollar, making it difficult for countries such as Turkey, Brazil, South Africa and India to secure the credit they need as money heads to the world’s biggest economy.
The MSCI Emerging Market index fell by more than 4% in 2021, badly lagging the 18% average gain across developed stock markets. That decline has been driven by China, which accounts for more than one-third of the index. China’s benchmark CSI 300 index enjoyed a stellar 2020, rising 27%, but fell by 4% last year, amid a regulatory clampdown on tech companies and concern over an overheating property market.
India delivered a standout performance in 2021, with the BSE Sensex index returning 21.4% amid excitement about technology flotations. The country boasts compelling long-term growth prospects, but investors have to pay up for them. On a cyclically-adjusted price/earnings ratio (Cape) of 33.8, India is almost as expensive as the US market.
South Africa has also delivered a strong performance, with the FTSE/JSE Top 40 rising by almost 20%. The commodities boom has boosted stocks in the nation that produces 80% of the world’s platinum-group metals. South African stocks have gained 26.5% since the start of 2020.
Turkey’s self-inflicted currency crisis has seen the few remaining foreign investors flee. Yet on the face of it the local BIST 100 index has had a banner year, gaining 44%. The problem? That is in local- currency terms and the lira has lost half of its value against the dollar this year. In dollar terms, the MSCI Turkey index has slumped by 27% in 2021.
It has also been a disappointing year in Latin American markets. Most commodity exporters did well, but Brazil failed to benefit, with the local Ibovespa down almost 10%. Copper producer Chile has had another bad year amid political turmoil. The local IPSA index has fallen by almost a fifth since the end of 2019, including a 3% fall in 2021.
Boosted by resilient oil prices, Russia’s MOEX index had another solid year, gaining 4.9% on the back of a 6% gain in 2019. Elsewhere in eastern Europe, Poland’s WIG20 index has returned a creditable 10%.
Delta has ravaged regional supply chains this year, but much of East Asia has still bucked the wider sell-off. With semiconductors in short supply, Taiwanese chip makers have had an excellent year, helping send the Taiex stock index up 18%. Thailand’s SET index has risen by 11%, making up for last year’s disappointing 8% fall.
Elsewhere in Southeast Asia, Indonesia’s IDX Composite rose 5.6% and the Philippines PSEi index was up by 1.4%. Vietnam’s VN-index delivered a blistering 33% return, but emerging-market investors won’t feel the uplift: the country is still classified by MSCI as a “frontier” rather than an “emerging market”.
Korea’s Kospi index was last year’s star performer, with a 30.8% gain, but foreign investors have now cashed in their profits. The removal of a short-selling ban at the end of the year by local financial regulators has also put stocks under pressure, leaving the home of Samsung with a modest 1.5% gain for the year.
Looking forward, supportive factors for emerging markets include attractive valuations and Chinese policy recently turning more pro-growth. However, risks remain and Emerging Market stocks look likely to deliver total returns of around 13% in 2022 according to the latest report from UBS. They will continue to be an important part of the portfolios we manage for our clients with the right risk profile.
31st January 2022
