Emerging Markets Outlook on - Lazard Asset Management
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Outlook on
Emerging Markets JAN 2021
Summary
• The recovery in emerging markets equities that began in
late March picked up steam in the fourth quarter thanks
to COVID-19 vaccine breakthroughs and the US election
outcome. The MSCI Emerging Markets Index outperformed
global developed markets equities in 2020. The MSCI EM Index posted an impressive recovery of more than
70% following the precipitous drop in global stock markets in the
• We expect that emerging markets economies will benefit first quarter, on par with both US equities and the broader developed
further as the vaccine is distributed in developed markets markets. China, the largest country in the MSCI EM Index at more
during the first half of 2021 and in emerging markets later in than 40%, was the third-best-performing market this year (behind
2021 and 2022; value companies, in particular, are poised to South Korea and Taiwan). Though China’s recovery since the bottom
benefit from higher global growth. has not been as large as the broader index, its equity market fell
• Despite a bumpy ride in 2020, emerging markets debt significantly less in the first quarter as the government was able to
demonstrated its resilience: All segments of the asset class effectively manage the spread of the virus (Exhibit 1).
finished the year in positive territory, with corporate The major events that propelled the strong fourth quarter may well
bonds leading. continue to drive emerging markets in 2021. In November, two
• An expected recovery in global economic growth, solid COVID-19 vaccines showed remarkable efficacy rates of around 95%
fundamentals, and attractive valuations in the most cyclical in late-stage trials, signaling that an economic rebound on the heels
parts of the asset class paint a bright picture for emerging of vaccine distribution may soon begin. US elections also brought
markets debt in the year ahead. welcome news for the markets: Democrat and former Vice President
Joseph Biden won the presidential election over Republican President
Donald Trump, holding out the promise of more stability. Prior to
the crucial Georgia run-off elections in early January, Republicans
Equity looked likely to maintain a majority in the US Senate. However, at the
time of this writing, Democrats appeared poised to take control of the
What was good for the global equity markets in the fourth quarter
chamber and therefore Congress.
was even better for emerging markets. The MSCI Emerging Markets
Index outperformed the MSCI World Index, representing developed In another encouraging, if less heralded, development for emerging
markets, in the last three months of 2020, with a return of 19.7% markets, value stocks rallied strongly in November and extended their
compared with 14.0%. Notwithstanding this year’s COVID-19 gains into December in anticipation of a global economic recovery in
pandemic and lockdowns around the world, emerging markets equities 2021. After 10 years of underperformance versus growth stocks and
also outperformed for the year: 18.3% versus 15.9%. many false starts for value over that time, we are not quick to call a
RD121362
“great rotation” into value. However, we believe that the fundamentals Successful distribution of the vaccine is now the overriding factor for
point to a potentially significant recovery in value stocks in 2021, and a return to growth in emerging markets—and much of the world—in
emerging markets, with many large industrial and cyclical companies, 2021. Developed countries with the capital to pre-order the vaccines,
would stand to benefit. notably the United States, the United Kingdom, and parts of Europe,
have lined up millions of doses already, and are likely to vaccinate large
The Linchpin: Vaccine Distribution portions of their populations during the first half of 2021 (Exhibit 2).
Investors showed just how important the COVID-19 vaccine is In fact, the largest vaccination campaign in history has already begun
to the prospects for emerging markets companies: In November, with more than 5.1 million doses administered in 22 countries as of
after the encouraging news on Pfizer and Moderna vaccine trials 30 December 2020.
were made public, the MSCI EM Index rose 9.3%. A gain of 7.4%
A few emerging markets may be able to vaccinate about half of their
followed in December.
populations by the second and third quarters, but many others are likely
to make the most significant progress in late 2021 and early 2022. Some
emerging markets governments have arranged deals with Pfizer, whose
Exhibit 1
2020 Equity Market Performance vaccine has been approved in several countries already, while others
have signed up with companies whose vaccines are still in late-stage
Emerging Markets Outperform Global Developed Markets
trials currently, such as AstraZeneca (Exhibit 3). However, after Britain
Index 100 = 31 December 2019 became the first country to grant emergency authorization to the vaccine
150
MSCI World MSCI EM MSCI China developed by AstraZeneca and University of Oxford, Argentina and India
MSCI US MSCI EM ex-China followed suit. The AstraZeneca vaccine could potentially clear the way for
125
a cheaper and easier-to-store alternative for much of the developing world.
100 Some vaccines, however, may ultimately not have successful trials, and the
number of vaccines eventually received could be lower than expected.
75
50 Exhibit 2
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
COVID-19 Vaccine Advance Market Commitments
(Millions of Doses)
MSCI MSCI EM MSCI
China ex-China MSCI EM MSCI US World (Millions)
3,000
COVID-19 Decline
(31 Dec - 23 Mar) (18.0%) (39.0%) (31.8%) (30.6%) (31.8%) Potential Dose Purchases
Recovery Since Confirmed Dose Purchases
Bottom
2,000
(23 Mar - 31 Dec) 58.0% 84.6% 73.5% 74.0% 70.0%
YTD Total Return
(30 Dec) 29.5% 12.6% 18.3% 20.7% 15.9% 1,000
As of 31 December 2020
The performance quoted represents past performance. Past performance is not a reli- 0
USA EU India COVAX UK Indonesia Canada Japan Brazil LATAM
able indicator of future results. This information is provided for illustrative purposes only ex. Brazil
and does not represent the performance of any product or strategy managed by Lazard.
The indices are unmanaged and have no fees. One cannot invest directly in an index. As of 20 November 2020
Source: MSCI Source: Duke Global Health Innovation Center, Capital Economics
Exhibit 3
Emerging Markets Confirmed Vaccine Pre-Orders (Per Capita)
Confirmed Vaccine Pre-Orders per Capita
2.5
COVAXX (United Biomedical) Sinovac J&J Sanofi-GSK
2.0 CanSino Biologics CureVac Moderna Novovax
G42 Healthcare Gamaleya Research Institute Pfizer/BioNTech Oxford/AstraZeneca
1.5
1.0
0.5
0.0
Chile EU Mexico India Argentina Brazil Indonesia Costa Rica Egypt Ecuador Venezuela Lebanon Peru Kuwait Bangladesh
As of 20 November 2020
Source: Duke Global Health Innovation Center, Capital Economics3
China and Russia have developed their own vaccines, and they have
vaccinated more than a million people. Russia announced that its Exhibit 4
Mobility: Most Markets Are Trending toward Reopening
Sputnik V vaccine has an efficacy rate of 91%; Argentina, Belarus,
Hungary, and Serbia have also begun vaccinating their populations Change in Work Mobility as Percent of Pre-COVID Baseline
12
with the Sputnik V vaccine. China’s Sinovac has been conducting UAE POR
AUS
PHI
Phase 3 trials in Brazil, Indonesia, and Turkey, with early data from 8 IND PER
FRA HUN GRE
PAK SPA ITA
ARG
Brazil showing an efficacy rate of between 50% and 90%. Sinopharm 4 COL POL
IRE
CZE
INDO SWI
announced that its vaccine candidate had an efficacy rate of 79% based SAU THA CHI UK
0
EGY
on an interim analysis of Phase 3 trials but provided no supporting NET
JAP/SIN MEX
MAL
NOR
SWE BEL
data, including the size of the trial population or information about -4 NZE
TURQ GER CAN AUS/FIN
any serious side effects. -8 ISR/QAT BRA/RUS/TAI/USA
SKO
DEN ZAF KEN OOO
Emerging markets countries that have not yet struck vaccine deals -12
-10 -5 0 5 10 15 20 25 30
may have to rely on COVAX, a global initiative led by the World Change in Retail Mobility as Percent of Pre-COVID Baseline
Health Organization (WHO) and the GAVI Alliance. COVAX
As of 11 December 2020
has committed to distributing a group of vaccines equitably Source: Google. 1 week change in 7-day average.
among developed and developing countries. Its goal is to supply 2
billion doses (vaccinating 1 billion people) by the end of 2021 to
participating countries, which include all emerging markets except
Russia. Although the COVAX portfolio is large in absolute terms, it virus outbreaks currently are handling them with fewer shutdowns
will not go far when split among the 172 participating countries. than in early 2020, even those with record-high case counts, which
points to higher economic activity going forward (Exhibit 4).
Other constraints could delay vaccine distribution in emerging markets,
including transport infrastructure and a limited number of professionals New US Administration: Political Risk Ebbs
to administer the vaccine. The challenge will be greater if the vaccines November was a pivot point not only due to the vaccine
need to be stored at very low temperatures, as Pfizer’s does. Costs of cold breakthroughs but also because of political change in Washington.
storage and transport typically account for four-fifths of the total cost of Although we expect the new Biden administration to remain tough
vaccination programs1 and would reduce the affordability and likelihood on trade with China, and possibly turn up the pressure on human
of widespread vaccination in the poorest countries. rights, as well as reintroduce sanctions on Russia, it is likely to work
From a logistics perspective, DHL estimates that the feasibility of in a more collaborative fashion with allies and engage more with
in-country vaccine distribution is generally high in East Asia, Eastern opponents. The result for the markets is likely to be lower political
Europe, the UAE, Chile, and South Africa. Distribution challenges risk premiums overall, in our view.
are significant across much of the rest of sub-Saharan Africa, and Biden’s victory over Trump also introduces the possibility that populism
parts of South Asia and Latin America, as well as in regions with both could diminish elsewhere in the years ahead—or at least become less
warm climates and limited cold-chain logistics infrastructure. Each noisy. Brazil’s President Jair Bolsonaro toned down his populist rhetoric
country’s experience in administering vaccine programs may also affect noticeably in the wake of US elections and Brazil’s municipal elections
its success; South Africa and parts of the Middle East and Asia, for in November when many candidates he supported lost.
example, have successfully handled vaccinations for AIDS, MERS, and
SARS relatively recently. For the markets, the US election results go hand in hand with the US
dollar, and after bouts of strength during the pandemic, the dollar
Overall, the economies of China, South Korea, and Taiwan are likely resumed its weaker trend in November—boosting emerging markets
to be less affected by the course of vaccine distribution because they currencies (Exhibit 5). Since the equity markets hit bottom in late
have generally dealt well with COVID-19 outbreaks and have already March, the dollar has weakened overall by 11%. In addition to the
reopened to a much greater extent than most. However, for countries expectation that the Federal Reserve will keep US interest rates low for
particularly hard hit by the virus, including Brazil, India, Mexico, some time, sizable fiscal stimulus is likely under the new administration,
and South Africa, obtaining multiple vaccine options cost effectively potentially leading to a wider fiscal deficit and ultimately a stable or
and administering them successfully, including choosing who will get weaker US dollar in 2021. When combined with a US budget deficit,
vaccinated first, will not only be key to reopening their economies, but it also suggests that dollar weakness could persist beyond then. In any
also help spark a global economic recovery in 2021. case, stronger currencies on the back of stronger economic growth could
Importantly, though, even if vaccine distribution takes longer than make emerging markets assets more attractive as investors seek yield.
expected in emerging markets, we believe the outlook is still positive. The incoming US administration has high hopes for passing an
The reopening of developed economies during the first half as people infrastructure spending program. In addition to potential benefits for
there are vaccinated is likely to trigger a global economic rebound that US growth and employment, this could increase demand for concrete
could benefit emerging markets. In addition, the low GDP growth and cement, energy, heavy machinery, materials, and industrial
base of 2020—the International Monetary Fund (IMF) has estimated products from companies in emerging markets—typically value
emerging markets growth for 2020 at negative 5.8%—means that companies. We expect earnings for these companies to increase in
growth in 2021 will almost certainly be higher. Finally, countries with 2021 as a result, further supporting emerging markets.4
to 2.1% for the MSCI EM Index. In the current low interest rate
Exhibit 5 environment with the search for yield, we believe emerging markets
US Dollar vs. MSCI EM Index: 5-Year Performance
banks should be even more attractive heading into 2021.
MSCI EM Index - Price Nominal Trade Weighted US Dollar Index
180
MSCI Index - Price [LHS]
115 China: One Step Forward, Two Steps Back
Nominal Trade Weighted US Dollar Index [RHS] As the “first in, first out” in the COVID-19 pandemic, China
160 110
enjoyed a much faster recovery in 2020, leading to a return of
140 105 29% in US dollar terms. Though still somewhat fragile for much
of the second half, the recovery gained strength in November and
120 100 December.
100 95 However, more signs of interference by the Chinese government
cloud the investment picture, in our view. In a dramatic intervention
80 90 in November, the Shanghai Stock Exchange halted the much-
2016 2017 2018 2019 2020
As of 31 December 2020
anticipated $37 billion initial public offering (IPO) for online
The performance quoted represents past performance. Past performance is not a reli- payments giant Ant Group in the eleventh hour. It would have been
able indicator of future results. This information is provided for illustrative purposes only the largest public equity offering in the world, but the government
and does not represent the performance of any product or strategy managed by Lazard.
The indices are unmanaged and have no fees. One cannot invest directly in an index. released new regulations for Internet lenders that could negatively
Source: FactSet, MSCI impact Ant’s business, its valuation, and its future IPO. Though the
new rules likely reflected regulators’ desire to control risk within the
financial system, the action caused confusion. To us, it served as a
Value and Growth reminder that the government is still involved in the fate of not only
The fourth quarter rally in value stocks in part reflected this potential state-owned enterprises (SOEs) but also private sector companies.
boost in demand from the United States. We think value is poised to Recently, Chinese regulators opened an investigation into whether
continue the recovery in 2021 as the economic backdrop changes. Alibaba, China’s largest e-commerce company, had engaged in
monopolistic practices by restricting vendors on its platform from
Higher global growth should be the biggest driver: Value companies selling merchandise on the platforms of competitors.
tend to be economically sensitive and to see higher earnings at the
beginning of an economic recovery. An effective vaccine rollout Ongoing tensions between China and the United States also create
over the course of 2021–2022 could also result in weaker demand a less than certain environment for Chinese equities. In November,
for COVID-19 related winners, which include some of the fastest- Trump issued an executive order banning American investors
growing companies now trading at very high valuations. During from transacting in the securities of 31 Chinese companies—since
this transition to a post-COVID economy, we expect the current raised to 35—that the Department of Defense has identified as
frenzy for aggressive growth, or Growth At Any Price (GAAP), may “communist Chinese military companies.” The list includes some
give way to a more selective approach based on fundamentals with large, well-known companies, such as the Chinese National Offshore
valuation discipline. Oil Corporation (CNOOC), and several are currently in equity
indices. Various index providers have announced their decisions to
For emerging markets, exporters in parts of Asia and Central and remove Chinese securities from their indices that are explicitly listed
Eastern Europe may lose the tailwind they enjoyed in 2020, but in the executive order (i.e., not affiliates or subsidiaries), and in early
higher commodity demand from reopened economies would lift January, the New York Stock Exchange, before reversing course,
export values for natural resources, notably oil and metals, and a said it would delist three state-owned Chinese telecom companies by
recovery in tourism would be a welcome boost to countries like 11 January when the requirement takes effect. Details of the order
Thailand, the Philippines, and Turkey. have not been finalized, though investors have until 11 November to
Within the value sector, hard-hit financials are particularly well divest. So far, it appears that the Biden administration has no plan to
positioned for a rally, in our view. Already, financials in Europe overturn the order. Importantly, the president will need to reaffirm
and Latin America registered the strongest November returns, the executive order annually or let it expire.
with banks up 39% in Poland, 37% in Turkey, and 34% in Peru. Over the fourth quarter, the list of Chinese companies opting to
Financials have lagged the broader equities market since it bottomed withdraw from US exchanges also grew. Rather than meet the
on 23 March, in part due to concern over loan quality during the Trump administration’s new requirement that they provide audit
pandemic. However, in addition to unprecedented policy support paperwork to US regulators, many companies have announced plans
for banks, non-performing loans have been lower than expected so to list on exchanges in China or go private. Also looming large for
far, and banks, which made aggressive loan-loss provisions in the investors is the US list of Chinese companies that are prohibited
first half of 2020, are likely past the peak of provisions, which should from purchasing supplies from US companies, though sanctions on
support an earnings and profits recovery. Given banks’ resilience in the telecoms giant Huawei were relaxed somewhat in November.
2020, we also think it is likely that dividend payments to investors,
suspended during the pandemic, will resume in 2021. Emerging
markets banks are trading with a dividend yield of 3.6% compared5
Poised to Resume the Growth Trajectory
Exhibit 6
The recovery in emerging markets equities that began in late March Global Growth Expected to Rebound, with EM Leading
picked up steam in the fourth quarter thanks to the COVID-19
GDP Growth (YoY; % Change)
vaccine breakthroughs and the US election outcome. Looking 5
ahead, we expect that emerging markets economies will benefit
as the vaccine is distributed in developed markets during the first
half of 2021 and in emerging markets in later 2021 into 2022. The 0
major central banks, with the exception of China’s, have shown no
inclination to raise rates, and inflation is expected to remain low in
-5
emerging markets overall, smoothing the way for higher growth. We
EM EU
believe these factors, along with a weaker US dollar, bode well for US Japan
value companies, in particular. -10
2016 2017 2018 2019 2020F 2021F
We recognize certain risks to our positive outlook. Even under a new
As of 31 December 2020
US administration, trade tensions with China are likely to remain Source: Lazard, Haver Analytics, JPMorgan
high, and anything that could prevent a meaningful rebound in
economic activity would hold back the equity markets, including lack
of fiscal stimulus where and when it is needed or a serious setback in
vaccine distribution. Exhibit 7
PMIs Leading in Emerging Markets
In some developed markets, the effects of job losses and fiscal deficits
Composite PMI (%)
due to the pandemic may be felt for years to come. For emerging 60
markets economies, however, we do not expect the pandemic to Emerging Markets
greatly alter the long-term trajectory for growth. Indeed, in its 50
latest forecast, the IMF projected 6% growth for emerging markets
and 3% for developed markets in 2021, with the growth gap only 40
widening after that. Thanks to their strong fundamentals, we believe
Developed Markets
emerging markets are positioned well not only to recover in 2021
30
but also to realize their higher growth potential in the years ahead.
20
Debt 2016 2017 2018 2019 2020
As of 31 December 2020
Things to Look Forward To Source: Bloomberg, IHS Markit
Emerging markets debt investors endured a bumpy ride in 2020,
but in the end the asset class once again demonstrated its resilience.
The blended asset class suffered the worst quarterly drawdown in its years with emerging markets leading the way (Exhibit 6). Although
nearly two-decade history in the first quarter, only to be followed by the rollout of COVID-19 vaccinations will be a gradual and uneven
its second-best quarterly return. Despite episodes of volatility akin to process, the arrival of multiple effective vaccines should lead to a
those during the global financial crisis, all segments of the asset class definitive normalization in economic activity. Importantly, all major
finished the year in positive territory. Emerging markets corporate regions are participating in the rebound, and emerging markets, which
bonds led the way with a return of 7.13%, owing to the strong balance contracted less than developed markets in the first place, are now
sheet positions of corporates and significant outperformance during recovering at a faster pace, according to leading economic indicators
the depths of the crisis. Hard currency sovereigns returned 5.26%, (Exhibit 7). Manufacturing PMIs are at multi-year highs in a number
benefiting from a longer duration profile amid a drop of 100 basis of key countries including China, India, and Brazil, further bolstering
points (bps) in US Treasury yields. Meanwhile, local currency debt the case of a broadening and accelerating global economic recovery
registered a gain of 2.69%, thanks to a strong fourth quarter rally in that should lead to emerging markets outperformance.
emerging markets currencies. Significant monetary and fiscal stimulus measures from the world’s
After an eventful and challenging year that included the unforeseeable, largest economies have boosted the rebound in global growth. Global
we believe emerging markets debt investors have much to look forward central banks have flooded their respective systems with liquidity.
to in 2021. A favorable macroeconomic backdrop, solid bottom-up The absolute numbers are enormous, and none of the banks has
fundamentals, and pockets of attractive valuation are all favorably shown any signs of pulling in the reins. In 2020, the central banks
aligned, supporting the case for a continued rally as we enter 2021. of the G10 economies injected around $4 trillion of liquidity into
financial markets through bond purchase programs, and they are
The top-down drivers of emerging markets debt performance are expected to inject nearly $3 trillion more in 2020. Given the vast
looking very strong. A V-shaped recovery already began to unfold in amounts of fiscal stimulus already provided, fiscal efforts may play
the second half of 2020, and the sharp rebound in demand is expected a smaller role in 2021. However, policy makers stand ready to act,
to continue. Global growth should reach its highest levels in several as reflected by the $900 billion package recently enacted in the6
United States. Given the significant slack in the economy, we do
not see stimulus efforts leading to significant inflationary pressures Exhibit 8
High Yield Spreads Remain Elevated
at this juncture, although we are keeping a watchful eye on pricing
pressures which could build as the recovery matures. Thus, financial Spread (bps)
1,200
conditions are likely to remain easy to facilitate the ongoing Investment Grade HY Average
recovery, supporting the case for a weaker US dollar and significant High Yield IG Average
capital inflows to emerging markets. 900
Additional macro factors bolstering the case for emerging markets
include a bullish outlook for commodity prices and reduced 600
uncertainty and tensions in global trade. Supply is tight across
commodity markets, including oil, and a rebound in demand as 300
global growth recovers should support strong commodity prices.
Geopolitical risks have decreased, as the Biden administration is 0
likely to pivot away from protectionist policies, which bodes well for 2006 2008 2010 2012 2014 2016 2018 2020
global trade and should further support growth. As of 31 December 2020
Source: Bloomberg, JPMorgan
From a bottom-up standpoint, emerging markets fundamentals have
stabilized on the back of improved growth expectations. Debt-to-
GDP ratios rose and fiscal balances deteriorated in 2020, but access
to capital has helped bridge the gap to a growth rebound in 2021. Exhibit 9
Stronger countries and corporates seized on the opportunity to issue The High Yield vs. Investment Grade Spread Differential Is
debt at low rates to significantly reduce financing needs for the year Historically Wide
ahead. Meanwhile, weaker credits have been supported by emergency Spread Differential (bps)
lending programs from the IMF. Additionally, G20 countries have 800
worked with the IMF and World Bank on debt service sustainability HY - IG HY - IG Average
initiatives to suspend interest payments from the poorest countries. 600
In 2020, most of the countries with the weakest balance sheets
either restructured their bonds (e.g., Ecuador and Argentina) or
400
defaulted on them (e.g., Lebanon and Zambia), and thus, with few
exceptions, we do not see material risk of sovereign credit events
in 2021. Nevertheless, fiscal positions are somewhat stretched in 200
some countries, leaving less room for fiscal response going forward.
However, with the Fed on hold indefinitely and inflation running 0
near all-time lows in a number of countries, emerging markets 2006 2008 2010 2012 2014 2016 2018 2020
central bankers have the luxury of maintaining accommodative As of 31 December 2020
monetary policies for the time being. Source: Bloomberg, JPMorgan
From a valuation standpoint, we see pockets of deep value in the
most cyclical parts of the asset class. Specifically, we see value in high bear market with episodes of outperformance. An inflection point
yield sovereign credit and local currency debt. High yield sovereign has proven illusory, but we believe the backdrop for sustainable
spreads are more than 600 bps over US Treasuries, which is wide outperformance may finally be in place, and we have shifted our
relative to history (Exhibit 8). Typically, one year after sell-offs risk usage accordingly. The missing ingredient for a sustainable rally
of greater than 5%, high yield spreads average around 465 bps, has been growth; This may be changing as the cyclical backdrop
indicating ample room for further spread compression. High yield improves, a trend that currencies stand to benefit from more than
spreads are also about 450 bps wide of investment grade sovereigns, any other part of the emerging markets debt asset class due to
still above levels seen during the global financial crisis (Exhibit their greater cyclicality. Aside from an improved growth outlook,
9). Given our outlook, we see scope for around 50–100 bps of factors favoring emerging markets currencies include clean investor
tightening in high yield spreads from current levels. In contrast, we positioning, supportive flows, diminished headwinds from dollar
see little value in investment grade, where spreads of around 150 bps strength, strong commodity prices, and valuations that remain
are back to where they began 2020 and essentially in line with recent dislocated despite the recent outperformance (Exhibit 10). While
averages. Thus, investment grade offers neither much room for monetary easing cycles in emerging markets have largely come to an
spread tightening nor a substantial cushion against a potential rise in end, with some central banks expected to begin raising rates later
US Treasury yields. in 2021, we expect developed markets central banks to maintain
We also expect local currency debt to rally in the coming quarters, their accommodative monetary stances over the next few years. An
with high yielders outperforming low yielders, given the former’s increase in interest rate differentials would lend further support to
greater sensitivity to growth and attractive valuations. Over the past emerging markets currencies.
several years, local currency debt has effectively been in a secularOutlook on Emerging Markets
continue to price in a degree of flight-to-safety premium as nominal
Exhibit 10 and real yields are near record lows in medium and long tenors of
Emerging Markets Currency Valuations Are Near
All-Time Lows
the yield curve. Additionally, US Treasury yield volatility is near
an all-time low, which in and of itself does not indicate that yields
EMFX Valuations EMFX Valuations
1.5 3.5
are destined to rise, but may indicate that investors have grown
GBI REER [LHS] complacent, thus increasing the risk that yields could rise rapidly
Commodities [RHS] should consensus views change. While inflation is likely to tick higher
1.3 2.5 from depressed levels, we do not see a drastic or rapid increase in
inflation as a major risk at this point. However, we do expect the
flight-to-safety premium currently embedded in yields to dissipate,
1.1 1.5 leading to an increase in yields. Thus, we have shortened duration to
defend against a potential rise in Treasury yields.
A key risk to our base case of a strong global growth rebound is that
0.9 0.5
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 COVID-19 vaccines do not prove to be as successful as anticipated.
As of 31 December 2020
We are encouraged by recent progress and believe that the ongoing
Commodities reflect S&P GSCI Index. rollout of vaccines will go a long way in normalizing the global
REER is the real effective exchange rate. economy, but there is uncertainty around widespread distribution and
Source: Lazard, Bloomberg, JPMorgan, S&P vaccination rates. Another important risk factor to our expectation of
emerging markets outperformance is a premature tightening of global
financial conditions similar to what occurred in 2018. We see such
Technicals also remain supportive as the search for yield continues a scenario as unlikely at this juncture; however, if it were to come to
to attract investor flows to emerging markets debt. Over the past pass, it would damage the prospects of recovery in emerging markets.
six months, investors have increased their emerging markets debt
exposure by $50 billion, and we expect the pace of inflows to Overall, we believe that after enduring a challenging period,
accelerate as the global search for yield intensifies due to yields near emerging markets debt investors have several things to look forward
record lows across most of the developed world. to in 2021. Top-down factors, bottom-up fundamentals, and
valuations are all favorably aligned, supporting the case for strong
Nevertheless, we are cognizant that risks remain, and we approach returns into 2021. We are deploying close to our full risk budget
2021 with a degree of caution. Although we do not see inflation as across strategies to capitalize on this environment while remaining
a major threat at this juncture, interest rate risk is skewed toward cognizant of the risks that lie ahead.
rising Treasury yields. Despite the rally in risk assets, Treasury yields
This content represents the views of the author(s), and its conclusions may vary from those held elsewhere within Lazard Asset Management.
Lazard is committed to giving our investment professionals the autonomy to develop their own investment views, which are informed by a
robust exchange of ideas throughout the firm.
Notes
1 Source: Capital Economics
Important Information
Originally published on 7 January 2021. Revised and republished on 8 January 2021.
This document reflects the views of Lazard Asset Management LLC or its affiliates (“Lazard”) based upon information believed to be reliable as of the publication date. There is no guarantee that any
forecast or opinion will be realized. This document is provided by Lazard Asset Management LLC or its affiliates (“Lazard”) for informational purposes only. Nothing herein constitutes investment
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