Contact Us Client Login CLIG Site

Emerging Markets Quarterly Outlook

October 2021*

Can EM Narrow the Gap?

A resurgence of COVID-19, faltering growth expectations and a sticky rise in inflation weighed on emerging markets (EM) during Q3. Concerns over China’s regulatory onslaught and its real estate sector further detracted from performance. The outlook remains challenging too given tightening global financial conditions and the unresolved fight against the pandemic.

During the past quarter, markets have become increasingly concerned about a growth slowdown, partly due to a resurgence of COVID-19, and partly due to global supply chain disruptions, which also caused a rise in inflation. This in turn tightened global financial conditions as several EM economies had to raise interest rates and expectations for monetary tightening by the Federal Reserve have shifted forward. It even raised the spectre of stagflation, albeit in a milder form than in the 1970s. Specific worries about China, the largest component of the MSCI EM Index with nearly a 35% weight, over heightened industry regulation and defaults in the real estate sector added to the challenges. As a result, EM equities underperformed developed markets (the MSCI World Index) by 8.1% points during Q3, bringing EM’s year-to-date underperformance to 14.3% points.

On the other hand, several key emerging markets were able to bring the latest COVID-19 outbreak under control, with a welcome deceleration in new cases observed in India, Mexico, Brazil and South Africa. These developments are not universal however as South Korea, Russia and Turkey experienced a sharp pick-up in infections at the same time. Progress on vaccination is equally varied with Turkey, South Korea and Brazil amongst the more advanced countries and Mexico, India, Russia and most of ASEAN amongst the laggards. The average number of doses dispensed in EM has risen to 86 per 100 persons, further narrowing the gap with DM (at 137).

Another key factor for emerging markets in 2021 has been the sharp rise in oil prices (as well as several other commodity prices) as the recovery in global energy demand could not be fully met by supply and transportation remains constrained. Brent crude gained a more modest 4.5% during Q3, but year-to-date the price of crude has risen by over 50%. This has clearly benefited large exporters like Saudi Arabia and Russia (as well as Brazil to a lesser extent), but is a challenge for importers such as Turkey and especially India, which simultaneously experienced a sharp rise in domestic demand amidst a swift economic recovery.

EM Country Allocation


  Chg -2 -1 0 +1 +2
Asia
 China -          
 South Korea          
 Taiwan -          
 Malaysia          
 Indonesia          
 Philippines -          
 Thailand -          
 Vietnam -          
 India          
Latin America
 Brazil          
 Mexico -          
Europe, Middle East and Africa
 Russia -          
 Turkey -          
 Saudi Arabia -          
 South Africa -          

Note: Up/down arrows indicate a positive/negative change in our asset allocation compared to the previous quarterly outlook. A dash indicates no change.

Source: City of London Investment Management

*The publication reflects asset performance up to 30 September, 2021, and macro events and data releases up to 12 October, 2021, unless indicated otherwise.

  Download the Full Report

The information contained herein is obtained from sources believed by City of London Investment Management Company Limited to be accurate and reliable. No responsibility can be accepted under any circumstances for errors of fact or omission. Any forward looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.

REGULATORY INFO

Important Information  |  Form ADV & Disclosures  |  UK Stewardship Code
Capital Requirements  |  Privacy & Cookie Policy

City of London Investment Management Company Limited (“CLIM”) is authorised and regulated for the conduct of investment business within the UK by the Financial Conduct Authority (FCA) and is registered as an Investment Advisor with the United States Securities and Exchange Commission (SEC).
Registered in England and Wales No. 2851236. Registered Office: 77 Gracechurch Street, London, EC3V 0AS, England.

© 2022 City of London Investment Management Company Limited.
All rights reserved.

City of London Investment Management Company Limited (“CLIM”) is authorised and regulated for the conduct of investment business within the UK by the Financial Conduct Authority (FCA) and is registered as an Investment Advisor with the United States Securities and Exchange Commission (SEC). Registered in England and Wales No. 2851236. Registered Office: 77 Gracechurch Street, London, EC3V 0AS, England.

© 2022 City of London Investment Management Company Limited. All rights reserved.