World Investment Outlook 2021: Chapter Four – Emerging Markets



Azerbaijan and Armenia may have signed a truce with Russian peacekeepers but this was a rare example in 2020 of tempers cooling rather than fraying. The EU applied sanctions to Belarus over the sixth consecutive election victory for President Lukashenko, the US hit Turkey with sanctions after Istanbul’s $740 billion arms deal with Moscow and Poland and Hungary spent much of the year trying to block the European Union’s €750 billion budget for fighting covid-19.

Throw in a coup in Mali, a failed coup in Venezuela and the resignation and the impeachment of Peru’s President Martín Vizcarra and 2020 was nothing if not eventful. The coming twelve months are also going to be busy. Peru will get to vote for a new leader and elections in Bulgaria, the Czech Republic, Chile, Argentina, Uganda, Zambia, Chad, Gabon and Russia, to name but a few, will give psephologists, diplomats, economics and investors plenty to ponder. Hopefully Ghana’s peaceful December 2020 election, when President Nana Akufo-Addo was re-elected (albeit with a reduced majority) will set the template, rather than the ballot in the Cote d’Ivoire, which the opposition boycotted when President Ouattara used a constitutional loophole to run for, and win, a third term.


International Monetary Fund loans or grants to South Africa, Nigeria, Mali, the Democratic Republic of Congo and Yemen, debt defaults in Zambia, Ecuador and Argentina and currency devaluations in Cuba, Nigeria and Lebanon all show how the global recession that followed the pandemic took a vicious toll on many emerging economies. An early-year plunge in oil and other commodity prices, amid the demand-side shock and recession that followed the earliest stages of the viral outbreak, took a particularly heavy toll on Russia, Brazil and Mexico, as well as key Middle Eastern and African exporters of hydrocarbons.

Emerging economies are expected to bounce back in 2021

  GDP growth (%, year-on-year)
  2016 2017 2018 2019 2020E 2021E
Emerging and Developing Asia 6.4% 6.5% 6.4% 5.5% (1.7%) 8.0%
Emerging and Developing Europe 3.1% 6.0% 3.1% 2.1% (4.6%) 3.9%
Latin America and Caribbean (0.9%) 1.3% 1.0% 0.0% (8.1%) 3.6%
Middle East and Central Asia 5.0% 2.2% 1.9% 1.4% (4.1%) 3.0%
Sub-Saharan Africa 1.4% 2.7% 3.2% 3.2% (3.0%) 3.1%
World 3.2% 3.7% 3.6% 2.8% (4.4%) 5.2%

Source: International Monetary Fund

As in the developed West, many governments responded to the economic downturn with fiscal stimulus, monetary stimulus or a combination of the two. Russia increased state spending by a quarter, even as Government revenues fell by a fifth, as it launched a fiscal boost worth around 4% of GDP, while Mexico unveiled a $14 billion infrastructure plan designed to run through to 2024, with the goal of funding some 39 major projects, most of which will actually be privately funded. Some of this was part of leftist President Andres Manuel Lopez Obrador’s efforts to build bridges, metaphorically and literally, with a business community that he had previously alienated.

Meanwhile, central banks slashed interest rates in South Africa, the Czech Republic, Poland, Russia, Colombia, Hungary, Nigeria and Brazil, to name but a few. The Banco do Brasil took its Selic rate down to a record-low of just 2% as emerging markets’ central banks contributed to a global tally of 208 interest rates cuts, compared to just eight rate hikes.

Global interest rate cuts massively outpaced increases for the second year in a row in 2020

Source: *2020 up to 9 Dec 2020

Such fiscal and monetary largesse, as well as vaccination programmes (despite Brazilian President Jair Bolsanaro’s bizarre suggestion that inoculation could turn people into crocodiles) underpin forecasts of a rebound from 2020’s deep economic downturn, although as in the West it seems unlikely that output will reach its pre-pandemic level until at least 2022.

However, another sign of the stresses and strains felt in 2020 is how all eight of those interest rate increases came from emerging economies: Tajikistan, Kyrgyzstan, the Czech Republic (which quickly changed course), Kazakhstan, Armenia, Turkey (twice) and Argentina.

Turkey had initially cut headline borrowing costs but its late-year policy switch means that it may be less of a potential accident waiting to happen in 2021. Economists feared the worst when President Erdogan sacked Murat Uysal from the post of Governor of the Central Bank of the Republic of Turkey after a one-third slump in the Turkish lira between January and November. But the new Governor, Naci Ağbal, has reached for a more orthodox playbook, swiftly hiking interest rates, despite the President’s historic dislike of such policies, and the lira has begun to stabilise. Fears of a default or capital controls, with knock-on effects upon other emerging markets, are thankfully receding, at least for now.

Interest rate hikes have eased the pressure on the Turkish lira – for now, at least

Source: Refinitiv data


In a year that began with a major market panic and a big shift away from risk, perceived or otherwise, emerging markets have understandably lagged their developed counterparts. Among the eight major geographic options available to investors, the Africa/Middle East region ranked fifth in sterling-based, total-return terms in 2020, while Eastern Europe came seventh and Latin America eighth and dead last. (The sixth—ranked straggler, and the only developed market in the bottom half of the table was none other than the UK).

Middle East & Africa ranked fifth out of the eight major regions in 2020

Source: Refinitiv data. Total returns in sterling terms from 1 Jan 2011 – 9 Dec 2020

Eastern Europe stumbled after three market-leading years out of four

Source: Refinitiv data. Total returns in sterling terms from 1 Jan 2011 – 9 Dec 2020

Latin American ranked dead last to continue a poor long-term run

Source: Refinitiv data. Total returns in sterling terms from 1 Jan 2011 – 9 Dec 2020

However, the picture may not be quite as bleak as it seems. Although emerging markets were shunned in the first half, they did forge a recovery in the second, as risk appetite began to improve, buoyed by fiscal and monetary stimulus programmes and hopes that the Pfizer-BioNTech, Moderna and AstraZeneca-University of Oxford vaccines, among others, will help to underpin a return to some degree of economic normality in 2021 and beyond.

In just the second half of 2020, Africa/Middle East ranked top and Latin America second, even if Eastern Europe dragged its heels by coming in ahead of only those negotiation-wracked laggards, Western Europe and the UK.

A strong second-half rally offered hope for 2021

Source: Refinitiv data. Total returns in sterling terms from 1 Jul to 9 Dec 2020

This switch toward emerging markets hints that investors are again looking for cyclical growth – ‘value’ for want of a better turn of phrase – rather than more reliable, trend, almost defensive progress – ‘growth’ - as well as global export and inflation plays, in the view that an economic recovery and perhaps even inflation may be coming.

Many an investor has lost money waiting for the return of both ‘value’ style-investing and inflation over the last decade or so, when a low-growth, low-interest-rate, low-inflation environment has seen long-duration assets, bonds and tech and biotech stocks beat short-duration assets like cyclical stocks, commodities and emerging markets hands down. But if we do get an unexpectedly strong recovery, this could change quickly, if the second half of 2020 is any guide, even though such a scenario may seem unlikely as the covid-19 case count keeps rising inexorably.

Two trends which became noticeable in the second half of 2020 and would help emerging markets in 2021 are dollar weakness and commodity price strength. While the past is no guarantee for the future, both have traditionally been harbingers of strong performance from emerging market equities.

A falling dollar, as benchmarked by the trade-weighted DXY (or ‘Dixie’) index helps emerging markets service their overseas (usually dollar-denominated) debts more easily, so the interest payments are less of a burden and the additional cash can be used more productively.

Emerging markets and the dollar have historically had an inverse relationship

Source: Refinitiv data

And while not all emerging markets are net exporters of commodities, some major ones, such as Brazil, Russia, Mexico and Saudi Arabia clearly are, so higher oil, metal or crop prices can boost income, employment and also inflows of valuable dollars with which to support their own currencies and again make any interest payments on overseas debt.

Strong commodity prices have historically been helpful for emerging markets

Source: Refinitiv data

Next chapter

Read more from our World Investment Outlook 2020 series:

World Investment Outlook – Chapter one: UK

World Investment Outlook – Chapter two: USA

World Investment Outlook – Chapter three: Europe

World Investment Outlook – Chapter four: Emerging Markets

World Investment Outlook – Chapter five: Asia

World Investment Outlook – Chapter six: Japan

These articles are for information purposes only and are not a personal recommendation or advice. Past performance is not a guide to future performance and some investment need to be held for the long term. Forecasts are not a reliable indicator of future performance.

russmould's picture
Written by:
Russ Mould

Russ Mould has 28 years' experience of the capital markets. He started at Scottish Equitable in 1991 as a fund manager and in 1993 he joined SG Warburg, now part of UBS investment bank, where he worked as equity analyst covering the technology sector for 12 years. Russ joined Shares in November 2005 as technology correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media by AJ Bell Group, he was appointed AJ Bell’s Investment Director in summer 2013.