Emerging Markets (EM) have demonstrated their resilience during the greatest economic shock since the Global Financial Crisis. This was contrary to market expectations and through 2021 EM stock markets suffered several pullbacks and saw their earnings multiple de-rated. We highlighted in last year’s outlook that ‘EM have undergone their most meaningful and abrupt stress test in recent history and passed… testimony to their greater resilience and maturity’. 2021 saw EM demonstrate similar characteristics. This time, in the face of a virulent Delta variant of Covid-19, tighter domestic liquidity conditions, and their largest economy, China, abruptly reviewing several of its regulatory frameworks. 2022 should see many of these headwinds fade, if not reverse. Investor expectations towards EM remain low and, taken in combination with a record valuation discounts compared to developed markets, EM can surprise positively.
The Pandemic Part III
As 2021 ends, we find ourselves heading into familiar territory given the identification of a new, and likely not the last, pandemic variant. It remains too early for the science to accurately assess its transmissibility and virulence. The hope is that the former is high and the latter low, and hence the variant serves to accelerate us towards natural global immunisation. This trajectory would be welcome on several fronts, and likely positive for risk sentiment and EM stock markets.
To date, global immunisation has been undermined by several factors, not least inequality. Lower income countries (as defined by the World Bank1 ) have only managed to vaccinate around 6% of their population with one dose. In contrast, the UK, for example, is fast deploying booster vaccines for a population that has already had access to two doses. Consequently, the risk of further variant mutations remains high.
Importantly, should the pandemic backdrop turn more difficult, EM have proven their resilience and policy orthodoxy in the face of variants. EM have double vaccinated around 70% of their populations, which is similar to developed markets, although their deployment programs have generally lagged. This means 2022 should see several economies continue to reopen and normalise from low levels. This will buoy operating environments and earnings visibility, and in turn broaden the investment opportunity. The rate of improvement is most evident in certain countries in SE Asia, EMEA and Latin America, as seen through positive revisions to GDP growth.
Policy overreaction risk is high
There has been greater acknowledgement of the endemic nature of Covid-19. This has led most countries that first employed a ‘zero tolerance approach’ to seek greater herd immunisation. This has not been the case for China, which poses both a support, and a risk, for 2022.