Rising commodity prices and earnings growth expectations have triggered bullish bets on emerging market stocks. Emerging market stocks have underperformed for more than a decade, putting them close to a 20-year low relative to developed-world stocks.
Goldman Sachs Group Group (Goldman Sachs Group Inc.), Bank of America Corporation (Bank of America Corp.) and Lazard Asset Management (Lazard Asset Management) expect investors to use low valuations to help the global economy recover from the epidemic once the vaccine is launched, which will boost stocks in developing countries. Markets such as South Africa, Russia and Brazil will benefit.
In the decade since the global financial crisis, Morgan Stanley capital international's emerging market stock index has risen by just 8%, while the benchmark stock index in developed countries has more than doubled.
Then the COVID-19 epidemic broke out in the world, and although stock markets rebounded strongly from their March 2020 lows, emerging market stocks lagged behind again. The MSCI developed market index has returned about 14 per cent since the beginning of 2021, while the emerging market index has fallen 5 per cent.
That is likely to change in the coming months as the global economic recovery gains momentum, inflation picks up and raw material prices driven by national infrastructure projects continue to rise.
There are signs that the shift has begun. BofA said capital flows from emerging markets in eastern Europe, the Middle East and Africa accelerated since March, outpacing inflows into bond funds to the highest level since 2014, as investors turned to value stocks.
Mr Razard said that while GDP growth in emerging markets lagged behind that of developed countries in 2021, that could start to change in the fourth quarter as economic activity in advanced economies began to slow and commodity prices rose.
The outperformance of US stocks over the past decade has been largely related to the large amount of liquidity provided by the Fed, most of which has failed to reach emerging markets. When liquidity disappears, stock markets around the world may suffer a temporary shock, but the US will lose its edge. This supports the idea that emerging market equities are likely to perform well in a post-stimulus world.
Stocks in developing countries fell along with global stocks after the Fed hinted that stimulus measures might start to be scaled back later this year, a testament to their sensitivity to the prospect of scaling back their bond purchases. The minutes of the Fed meeting also led to a fall in commodity prices.
At the same time, not everyone believes that the worst is over. Blackrock Investment Research Institute downgraded emerging market stocks to neutral earlier this month because of uncertainty about the dollar's outlook and policy tightening.