So far, the global economic recovery from the Covid-19 fallout has been led by developed markets and emerging Asia, spearheaded by China. Looking ahead, we think the catchup trade could ripple out across other emerging markets, driven by the availability of vaccines, the reflationary impulse from China and developed markets, and the lagged impact of monetary easing.
Emerging EMEA (Europe, Middle East and Africa) and Latin American stocks are particularly well positioned to reap the benefits of these trends. This week’s Chart Room looks at the regions with the largest exposure to the re-opening of economies globally, based on those markets with relatively high weightings to cyclical stocks like financials and commodities.
Emerging markets and reopening trade
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Source: Fidelity International, MSCI, February 2021. Defensives classification includes: IT, utilities, healthcare, staples and communication services. Other cyclicals classification includes: industrials, real estate and discretionary. Commodities includes: Metals and energy.
Consider Latin American economies, which bottomed in April and May amid social mobility restrictions imposed as a result of the coronavirus outbreak. More recently, governments have begun to gradually open economies, as the number of new cases starts to stabilise. While it will take time for these countries to return to a sense of normality, there are promising signs of recovery.
As sentiment towards Latin America and EMEA regions improves, supported by a pick-up in activity as well as inflationary support for commodities, we could see a sharp re-rating of stocks in these markets from these historically low valuations. Nonetheless, selectivity remains paramount, given the differing levels of strength amongst sovereign (and also corporate) balance sheets.
Moreover, the unprecedented levels of government stimulus globally are also likely to raise inflationary pressures. As these pressures mount, many commodities can provide a natural inflationary hedge, underpinning the case for selective exposure to commodity rich regions like Latin America and EMEA.
