Emerging markets could be the best opportunity for 2021. But they have been primarily slept on and ignored by American investors. Around less than 5% of American investors have any emerging market exposure in their portfolios at all.
So why this year, more than other years, should we consider emerging markets?
For one, there are macro-level tailwinds for the U.S. Dollar. With trillions in economic stimulus seemingly imminent, all-time low-interest rates, American debt endlessly ballooning, and inflation possibly returning by H2 2021, the U.S. Dollar, which has already been plummeting since mid-March 2020, could continue to fall.
With the decline in the U.S. Dollar comes the strengthening of emerging markets- both currencies and stocks. Another byproduct of the U.S. Dollar’s decline? A rise in commodity prices and metals.
That’s why the following three emerging markets could significantly benefit- Russia (ERUS ETF), Chile (ECH ETF), and Peru (EPU ETF).
In a Bloomberg study, Russia came second as the top emerging market for 2021 due to robust external accounts, a healthy fiscal profile, and an undervalued currency.
But what could set Russia up for a successful 2021 is its hot commodity market. Take your preconceived notions of Russia out of the picture. It’s one of the fastest-growing emerging markets globally. Russia is the world’s largest exporter of natural gas, a top oil producer, and one of the world's largest steel producers.
Chile and Peru could benefit from a declining dollar as well. Chile is one of South America's wealthiest countries and has a plethora of natural resources and minerals. Chile is the world's largest exporter of copper and the world’s largest exporter of lithium. Some believe that Chile also has nearly ¼ of the world’s lithium reserves. Keep in mind that with demand growing for EVs and batteries, that the need for lithium could skyrocket. Peru also may have much upside as a developing economy with robust gold and copper stockpiles.
Another tailwind for emerging markets could be demographics. While developed economies are aging, emerging economies are younger and growing faster. Countries like Indonesia (EIDO ETF), Thailand (THD ETF), and Vietnam (VNM ETF) could immensely benefit.
Indonesia is already the 4th most populous nation in the world. Its young demographics and a hot economy could position it as a Top 5 economy by 2025. Thailand is the second largest economy behind Indonesia, has a young population, and was ranked as the top emerging market for 2021 in the aforementioned Bloomberg study. Thailand topped the list due to abundant reserves and a high potential for portfolio inflows. Lastly, Vietnam has turned itself into a rapidly growing economy ever since the 1997 Asian Financial Crisis. According to PWC, Vietnam could be the fastest-growing economy globally, and become the 20th largest economy in the world by 2050.
So what else could benefit specific emerging markets? Geopolitical tensions with China. China has an undeniable upside, but it also has significant risks. The U.S. and China’s relationship is tense at best. Other countries are beginning to have fractured relationships with China due to the pandemic and their trade policies.
Despite China’s robust economic response to COVID-19, retail sales still managed to fall 3.9% over 2020, marking China’s first contraction since 1968.
With the same type of regional upside as China, without the same kind of risks or baked-in economic recovery, look at Taiwan and South Korea.
ETFs representing Taiwan (EWT) and South Korea (EWY) have outperformed the SPY ETF tracking the S&P 500 over the short-, medium-, and long-term by a significant margin.
Since the market bottomed on March 23, 2020, the SPY saw a healthy return of 74.33%. However, in that same period, the EWT returned 92.22%, and the EWY returned 143.77%.
Since September 1, 2020, the SPY has returned just about 9.75% compared to 31.67% for the EWT and 48.48% for the EWY.
The trend has stayed the same so far in 2021 too. Since the first trading day of the year on January 4, the SPY gained just around 4% compared to 7.16% for the EWT and 6.74% for the EWY.
Taiwan and South Korea are compelling cases for emerging markets because they almost have the upside of a developing economy cushioned by economic stability. Taiwan is technically a developing country, but it has low inflation, low unemployment, consistent trade surpluses, and high foreign reserves. It is also a modern economy with diverse trading partners. South Korea has also positioned itself with a stable economy representing nearly 2.47% of the global GDP. It also has a very supportive central bank and many exports in the automotive industry and consumer electronics such as Hyundai, Kia, and Samsung.
Do with all of this data what you will. But it’s pretty clear where the best opportunities for 2021 lie. It seems that this trend already started in the last quarter of 2020 too. Just look at how ETFs tracking the countries mentioned have performed compared to the SPY since September 1.