Year of the Ox reflections: How emerging markets were eclipsed in 2021
Every Chinese New Year, AsianInvestor makes 10 predictions about the economic, political and financial developments that could impact global markets and asset owners.
One year on, we review these forecasts to see how well we did it. This reflection examines whether emerging market equities outperformed developed markets in 2021.
Will emerging market equities outperform developed market equities?
Answer: Yes
Verdict: Incorrect
Emerging market equities were a big disappointment in 2021, dragged down largely by the regulatory issues around Chinese equities. Developed markets, on the other hand, led by bullish US stocks, showed their best performance in years, generating double-digit returns for asset owners’ portfolios.
Indices showed the massive scale of the disparity between emerging and developed markets. In 2021, the MSCI World Index, which tracks developed markets’ large and mid-caps, rallied 21.8%, while MSCI Emerging Markets Index lost 2.5%.
Of the emerging markets, China lost the most in 2021 as the Chinese government initiated round after round of regulatory clampdown on its overheated technology, private education, and real estate sectors.
Tech titans such as Alibaba, Tencent, Meituan, and JD.com - once the heavyweights of fund managers’ Chinese equity allocation - surrendered all the gains they made in the incredible rallies of the second half of 2020.
The recovery has been slow and painful. By 2021, onshore Chinese A-shares were up slightly by about 5%.
Similarly, most ASEAN markets except for Singapore lagged the region in 2021, impeded by the resurgence of Covid and social and travel restrictions. Other markets like Brazil and Korea were also under pressure from domestic outbreaks.
Taiwan, India and the Middle East were the only bright spots among emerging market stocks, fueled by strong economic growth and technology-related exports.
While the US and European equities had moments of struggle during 2021, largely they were bullish throughout the year fueled by a robust economic recovery and quantitative easing. Three major indices on Wall Street all soared some 20% to 30% in 2021 to hit record highs. In Europe, the pan-European Euro Stoxx index also rose over 20% with banks and tech stocks outperforming.
Hong Kong was the most disappointing developed market as it became swamped by the backwash of China’s regulatory crackdown. The Hang Seng Index dropped by 14%, and the Hang Seng Tech Index slumped 33%.
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Going into 2022, inflation has hit a decades high across developed markets, pushing central banks to consider a series of interest rate hikes. So far, the S&P 500 has dropped 4.6%, the Nasdaq Composite has lost 8.3%, and the Dow Jones Industrial Average 2.7%.
Nevertheless, major fund houses believe that equities will continue to outperform bonds in 2022, albeit with higher volatility.
They see small gains in developed markets amid rising prices and tighter monetary conditions. Those with strong pricing power and earning prospects are expected to be the winners while rate hikes could trigger a correction.
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Fund managers, meanwhile, remain relatively positive about emerging markets in 2022, led by China and ASEAN countries which have shown an accelerated rate of vaccination, continued moves towards digitalisation while concerns over inlfation have been tamed by a tendency in the region towards excess supply and weaker demand.
These factors are only likely to come into play, though, in the second half of the year as the pressure from the Omicron outbreak starts to recede.
“We expect emerging markets to start outperforming developed markets during the year as monetary policies diverge. Regulatory tightening in China is probably past its worst and monetary policy has started to ease," Eastspring said in a recent 2022 outlook.
"Valuations of Chinese equities look attractive. Value equities’ outperformance has probably further to run as investors gravitate towards cyclical sectors along with a normalising economy.”