Emerging Market Stocks to Continue Rising Next Year

"Global Economic Stimulus Moves Gain Momentum... Risk Asset Investment Sentiment Expected to Remain Strong"
Premium for National Stock Markets with Active Response to COVID-19-Induced Industrial Structural Changes Increases

On the 14th (local time), Dr. Michelle Chester at Long Island Jewish Medical Center in Queens, New York City, USA, is holding the Pfizer-BioNTech COVID-19 vaccine ahead of the first COVID-19 vaccination in the United States.
[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] There is a forecast that emerging market stocks will show strength for the time being. The expectation of economic recovery due to the distribution of the COVID-19 vaccine and the weak dollar were cited as common positive factors for emerging market risk assets. Supply disruptions of raw materials caused by conflicts between China and Australia have benefited the stock markets of resource-rich countries such as Brazil and Russia, while the rebound of value stocks in finance and energy sectors due to rising market interest rates is also advantageous for emerging market stocks, which have a high proportion of traditional industries.

On the 25th, KB Securities suggested increasing the investment weight in emerging market stocks over developed market stocks from a short-term (3 months) perspective. From a long-term (1 year) perspective, it advised expanding the weight of South Korea and China in particular, as inflation intensity and fiscal issues need to be confirmed. Despite the resurgence of COVID-19, the expectation of vaccine commercialization and additional stimulus measures in the U.S. are driving emerging market investment sentiment and supply-demand.

Transmission of Economic Recovery from China: "Focus on Emerging Market ETFs"

First, the narrowing performance gap between value stocks and growth stocks is positive for emerging market stocks. Next year, China, which is showing a particularly favorable economic recovery trend, is expected to play a role as a catalyst for global economic recovery. Last month, real indicators such as China's industrial production and retail sales continued to improve compared to the previous month. The Biden administration and the Federal Reserve in the U.S. are also expected to maintain their stimulus stance and current monetary policy. Changmin Lee, a researcher at KB Securities, explained, "The Eurozone is also expected to struggle not to fall behind in the U.S.-China competition, and global major countries' economic recovery, vaccine distribution, and easing of lockdown concerns will solidify risk asset investment sentiment," adding, "Regarding inflation, except for some emerging countries such as Argentina and Turkey, it is not yet a major variable."

In this context, exchange-traded funds (ETFs) investing broadly in emerging markets including South Korea and China are expected to be promising. Researcher Lee said, "Before the release of the COVID-19 vaccine, emerging market stocks such as South Korea, China, and Taiwan, which have a high proportion of growth stocks like technology and healthcare, showed differentiated performance, but economic recovery, rising bond yields, and recovery expectations in COVID-related industries will create an opportunity to offset the underperformance of value stocks," adding, "The price burden of growth stocks, reflation (appropriate level of monetary expansion), and economic recovery expectations will stimulate investment sentiment across emerging market stocks, including those that underperformed due to COVID-19." In fact, assets under management (AUM) of major emerging market ETFs such as VWO, EEM, IEMG, and EMIM are on the rise. Net inflows continue even after deducting asset price increases.

Alleviation of Price Burden in Emerging Market Stocks... Premium for Countries with Excellent COVID Response Increases

KB Securities evaluated the current level of the global stock market by comparing growth rates and market capitalization trends of major global countries. Analyzing the ratio of nominal GDP to market capitalization of 17 major countries globally (6 developed countries, 11 emerging countries) since 2011, it was found that in developed countries, growth rates and market capitalization did not show a significant correlation with the stock market. On the other hand, in emerging countries, corrections occurred when the market capitalization relative to nominal GDP approached or exceeded 80% (based on the Morgan Stanley Capital International Emerging Markets Index). As of the end of last month, the ratio of market capitalization to the sum of nominal GDP for the 11 emerging market stock markets in the third quarter was 87%, the highest level since 2011. By country, the current ratios of Taiwan, South Korea, China, and India stock markets exceeded the average since 2011, while Malaysia, Mexico, the Philippines, and Indonesia were below average.

Researcher Lee concluded, "In terms of growth and price, stock markets of countries that actively respond to the industrial structural changes triggered by COVID-19 will be recognized with a premium," and predicted, "With the weak dollar trend and the emerging market economy expected to grow 6.4% in 2021, valuation burdens will be alleviated."

This content was produced with the assistance of AI translation services.