Why emerging market investors should enjoy the surge inspired by Biden and vaccines while it lasts

Name: China GDP: economy grew by 4.9 per cent in third quarter of 2020
Uploaded: 2021-01-28T07:30:19.000Z
Duration: 1 min 47 s
Description: China GDP: economy grew by 4.9 per cent in third quarter of 2020

The mix of unprecedented monetary and fiscal stimulus and expectations that mass vaccination programmes will end the pandemic has sparked an extended rally

However, with mounting unease about speculative bubbles and asset prices reliant on bond yields staying at historic lows, investors should not get carried away

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A man wearing a mask is seen inside the Shanghai Stock Exchange building at the Pudong financial district on February 28, 2020. Photo: Reuters

Nicholas Spiro

Published: 3:30pm, 28 Jan 2021Updated: 5:48pm, 28 Jan 2021

Emerging markets have begun the year with a bang. In the first three weeks of 2021, investors poured US$25.4 billion into emerging market bond and equity funds. This is almost exactly the same amount as the total inflows for the whole of 2020, according to data from JPMorgan.

The voracious appetite for higher-yielding assets has been evident for some time. The combination of unprecedented levels of monetary and fiscal stimulus and expectations that the roll-out of mass vaccination programmes will end the Covid-19 pandemic has turbocharged a 10-month-long rally.

Since late last March, the MSCI Emerging Markets Index, a leading gauge of stocks in developing economies, has soared more than 80 per cent, to an all-time high. It has exceeded its peak just before the eruption of the 2008 financial crisis.

The corporate bonds of developing economies are also on a tear. The average yield on JPMorgan’s index of emerging market corporate bonds stands a whisker above its record low.

A confluence of factors has put emerging markets in a sweet spot. First, the US Federal Reserve’s ultra-loose monetary policy has driven down bond yields to close to zero and caused a sharp decline in the US dollar, creating extremely supportive financial conditions for risk assets.

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China GDP: economy grew by 4.9 per cent in third quarter of 2020

Second, an economic recovery in the developing world is gaining momentum, underpinned by the optimism generated by vaccines and the brisk rebound in China, which now accounts for 40 per cent of the MSCI Emerging Markets Index. This makes emerging market stocks a play on the resilience and growth prospects of the country that has been the biggest winner from the crisis.