Emerging markets equities largely underperformed major indices in 2021, a continuation of longer-term weakness. However, expectations for a reversal of that trend are rising in the new year with EM stocks trading at a steep discount and more blockbuster IPOs on the way across Asia.
A rising dollar and tighter monetary policy in local markets are key hurdles emerging economies will have to overcome to experience a breakout.
Related ETFs: iShares MSCI Emerging Markets ETF (EEM), iShares MSCI India ETF (INDA), iShares MSCI Taiwan ETF (EWT), iShares MSCI Russia ETF (ERUS), iShares MSCI Mexico ETF (EWW)
EMs Look to Rebound From China-Driven Weakness
Emerging market equities have drastically underperformed the S&P 500 and other major indices for more than a decade now, and 2021 was no different.
While The MSCI All-Country World index of global stock markets closed a third consecutive year of double-digit returns, and the S&P 500 rose by nearly 30% over the course of the year, the iShares MSCI Emerging Markets ETF (EEM) actually declined about 5%.
Even a rash of IPOs could not boost emerging markets meaningfully. Per Bloomberg, 1,162 companies from emerging markets made initial public offerings last year on local or foreign exchanges. All together, they raised $228 billion via listings, about a 31% increase from 2020. A closer look, however, shows the MSCI emerging market index is heavily weighted toward shares of Chinese companies – making up about 30% of the index – which languished under heavy regulatory scrutiny last year and closed the year under a cloud of economic uncertainty surrounding the collapse of real estate giant Evergrande.
If we approach other large emerging markets on a more individualized basis, the year wasn’t so bad. Funds like the iShares MSCI India ETF (INDA), iShares MSCI Taiwan ETF (EWT), iShares MSCI Russia ETF (ERUS), and iShares MSCI Mexico ETF (EWW) returned 13%, 24%, 11%, and 16%, respectively.
Per the Financial Times, JPMorgan’s equity analysts think emerging market equities will return 18% in 2022 thanks to a combination of corporate earnings growth and fading fears that the Chinese regulatory clampdown will escalate and broaden. Meanwhile, Bank of America’s fund manager survey indicated that emerging market stocks are expected to produce the best returns of the coming year.
The silver lining to emerging market equities’ long-running weakness is that they now present a significant discount opportunity. As Reuters notes, emerging stocks now trade at the deepest discount to developed equities in 17 years.
It is possible that the aforementioned wave of IPOs may have crested in 2021, but that doesn’t mean blockbuster offerings are totally off the table. Barron’s notes that battery maker LG Energy Solution should instantly become South Korea’s No. 2 company in January, when it raises $10 billion-plus for a valuation up to…
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