Despite being widely tipped, emerging markets have failed to reward investors in 2021.
This year was supposed to be a good one for emerging markets. With vaccines being rolled out, lockdowns lifted and economies recovering, 2021 was set to be defined by the so-called reflation trade. And according to many investors, emerging markets were the best way to play this. In December 2020, a survey from the Association of Investment Companies (AIC) showed that out of all the regions investment trust managers were most bullish on emerging markets in 2021.
This trade has not worked out. Year-to-date, the MSCI Emerging Market Index has made a loss of just over 1% in sterling terms. In comparison, the MSCI World Index has returned almost 21% in sterling terms.
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Of course, this is nothing new. The outperformance of developed markets compared to emerging markets has been a persistent feature of the past decade. Since December 2011, the MSCI Emerging Market Index has provided a return of 106%. In contrast, the MSCI World Index has returned just over 300%. Despite popular talking points about strong demographic profiles of emerging markets and the rise of Asia’s middle class, this has struggled to translate into strong returns. This serves as a reminder that strong economic performance doesn’t necessarily translate into strong equity market performance.
However, something specific has been holding back the region this year: China. The world’s second-largest economy has had several issues, ranging from the private sector “crackdown” to fears about the collapse of property giant Evergrande (SEHK:3333). As a result, the MSCI China Index is down almost 16% this year.
With China accounting for over 40% of the MSCI Emerging Market Index at the start of 2021, the country’s share price declines have had a major effect on the regional index. This can also be seen when you strip out China from the index. For example, the Lyxor MSCI Emerging Mkt Ex China ETF (LSE:EMXC), which tracks a version of the index that excludes China, has provided a return of almost 8%.
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However, while removing China lifts emerging market performance, its returns year-to-date are still below the MSCI World Index. Alongside China, several other emerging markets have also struggled. South Korea, the third-largest constituent of the index, has lost almost 10% (using the MSCI Korea Index) so far this year. Meanwhile, Brazil has fared worse than even China, with the MSCI Brazil Index down almost 18% in sterling terms.
One bright spot in emerging markets in 2021 has been India. Despite grim headlines about the country’s Covid woes earlier in the year, the MSCI India Index has been able to return over 25%.
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