Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 422

Four reasons emerging markets should outperform post-COVID

Policymakers in both developed and emerging markets are attempting to reopen their economies as they manage the virus , with varying degrees of success. Despite the short-term uncertainty, there are plenty of attractive opportunities for investors in emerging markets.

1. Inflation is transitory amid central bank discipline

Inflation in emerging markets is often misunderstood. About 85% of the MSCI Emerging Markets Index is made up of six countries: Brazil, Russia, India, China, Korea and Taiwan. Add South Africa and Mexico and almost the entire index is concentrated in a relatively small number of countries.

Supply chain dislocation and numerous bottlenecks due to COVID-19 have caused a big pop in inflation both in emerging and developed markets. We anticipate this will be transitory as disruptions diminish and headline inflation begins to reduce, allowing lower monetary policy rates to be sustained.

Most importantly, it’s been vital for emerging market countries to maintain the hard-fought credibility of their central banks. So far, the signs are good. As an example, at present there’s a night-and-day difference in the improved quality of central bank management in Brazil compared with what we saw in 1991.

2. Emerging markets are maturing

The pandemic has shown that the emerging market complex is looking more mature, with Brazil and Russia hiking interest rates to maintain credibility. This is a stark shift from 2020, where central banks across the world were forced to cut rates in order to protect economies following the onset of the virus. While developed markets remain mired in emergency level policy settings, it is pleasing to see the emerging world pivot to a more proactive stance.

In fiscal stimulus terms, there haven’t been substantial moves outside of those countries with large international reserves or the ability to borrow capital on the international market. The emerging markets approach has been cautious and supportive. For example, China has been very restrained relative to what it did in 2008, while still providing ample stimulus to return its economy to a strong growth footing. Ironically, because emerging market countries couldn’t borrow as much as the West, there’s a lot less pressure placed upon their currencies and debt levels than in developed countries.

Overall, it looks like the emerging market complex will get through this period of unprecedented monetary and fiscal policy response while actually strengthening the credibility that has been built up over the last 20 years.

3. Emerging markets currencies and commodities are attractive

Emerging markets currency (EMFX) is reaching levels we haven’t seen since 2002. From 2001 to 2008, there was a very substantial rally in EMFX. One of the great convergence trades was when China, India, Brazil, Korea and Taiwan emerged on the global scene. Their GDP developed well, resulting in a dramatic rerating of emerging markets.

Since the bounce after the GFC, these countries have performed poorly relative to the S&P500. But that is set to change as emerging market countries benefit from surging demand for commodities on the back of significant global stimulus, infrastructure spending and recovery.

We’re more bullish on commodities than most, but the street is catching up with our numbers. The outlook is positive for lithium (due to short-term demand and a lack of supply), copper (it is integral to decarbonisation and electric vehicles) and aluminium (thanks to supply base issues and the need to ‘greenify’ production). We’re less bullish on steel and we’re very bearish on iron ore relative to the consensus due to significant supply capacity in Australia and Brazil.

Commodities remain important for the emerging market complex in supporting economic growth. Therefore, we believe emerging markets countries will provide strong outperformance over the next couple of years, if not the next decade, versus the developed markets. As a result, EMFX now looks very attractively valued.

4. Chinese regulatory risk is manageable

The recent China Securities Regulatory Commission (CSRC) meeting with executives of major investment banks attempted to ease market fears about Beijing’s crackdown on the private education industry.

The regulator made clear that China will continue to welcome foreign capital and that there is no intention of any economic decoupling. The authorities will allow time for policy adjustments and public consultation. Unsurprisingly, the CSRC also outlined a positive economic growth outlook for the country.

We believe this gives reassurance that the tutoring industry decision was a unique case. If China can convince the market that the regulatory changes are not an attack on profitable companies, confidence should slowly return.

The last 30 years of investing in China has shown that you don’t want to be fighting against the authorities. The key point about managing Chinese regulatory risk is that if you align yourself with the authorities, there are very substantial returns to be made.

Which emerging markets sectors could outperform?

The pace of COVID-19 vaccine rollout is accelerating in larger emerging market countries, which is helping their cyclical recoveries. This trend is expected to continue throughout the second half of the year and may allow emerging markets to reopen their economies faster than expected, resulting in significant GDP growth throughout 2021.

As an asset class, MSCI emerging and frontier market equities are expected to be up 7-12% in the next 6-9 months (source: RWC Partners and Bloomberg as at 30 July 2021). This will see the so-called ‘Fragile Four’ – Brazil, India, Turkey, and South Africa – outperform, while long-term upward pressure on the price of oil will also see Russia and Saudi Arabia benefit. China will continue to be weighed down by geopolitical forces and the lack of flows into emerging markets.

Thematically, we expect everything climate change-related to do well, including copper, lithium, solar energy, alternative energy, and electric vehicles. The EMFX carry trade remains intact which should support the financial services and housing sectors, especially in high yielding countries. In emerging markets, the COVID-19 recovery will be fuelled by travel, modern retail, and consumer discretionary spending.


James Johnstone, Co-Head of Emerging & Frontier Markets at RWC Partners, a Channel Capital partner. Access to the RWC Global Emerging Markets Fund is available to Australian investors via Channel Capital, a sponsor of Firstlinks. This article is genral information and does not consider the circumstances of any investor.

For more articles and papers from Channel Capital and partners, click here.

The webinar “RWC Partners: Adapting to the future – long term trends in emerging and frontier markets” can be viewed here.



What to watch in post-pandemic 2021

Brazil on the eve of the World Cup


Most viewed in recent weeks

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Latest Updates


$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.


Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated' investors can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.