Emerging-Market Investors Predict Rally Will Roll On Into 2021

(Bloomberg) -- Emerging-market watchers are confident this year’s rally will stretch into 2021, but they say the biggest swing factor will be how effectively vaccination programs are rolled out.

The efficacy of coronavirus vaccines is likely to be the biggest market driver of returns next year, beating out uncertainty over the fiscal laxity of governments and the path of economic growth in China, according to a Bloomberg survey of 63 investors, strategists and traders. China emerged as the overwhelming favorite investment target for currencies and stocks, while investors were most optimistic on Latin American bonds, the Nov. 18-25 poll found. Argentina remained a source of unease.

More than 2 million people are estimated to have been vaccinated, according to data compiled by Bloomberg, mostly in developed markets. Emerging nations have also made progress, with Gulf states having already begun inoculations, while China aims to vaccinate 50 million people before the Lunar New Year holiday.

The survey underscores how the battle against Covid-19 turned markets on their heads this year, forcing investors to throw out the playbook and look for fresh cues for the direction of asset prices. After collapsing in the first half, emerging markets then rebounded, handing investors more than $5 trillion in wealth this year largely as vaccine breakthroughs supported risk assets. An index of bond returns is close to a record high, while gauges of stocks and currencies are near the strongest levels in more than two years.

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“As economies reopen, vaccines are distributed and risk appetite returns, 2021 could be a break-out year for emerging markets, especially if the U.S. dollar continues to weaken,” said Christopher White, co-manager of the emerging markets discovery fund at Somerset Capital Management LLP in London. “An unprecedented U.S. peacetime fiscal deficit, combined with aggressive monetary stimulus is putting pressure on the dollar, which is very helpful for many emerging economies.”

Read the last EM survey here. For a list of previous surveys, click here.

Asia kept its top position for currencies and stocks in the survey as the region led the recovery from the pandemic. Latin America, with relatively higher bond yields, eclipsed other regions as offering the best prospects for fixed income.

The outlook for China’s economy remained one of the top three likely determinants for prices in 2021. Stimulus spending and its impact on the fiscal health of governments took third spot as concerns emerged over how much scope central banks have left to lower borrowing costs.

U.S. stimulus will remain key to risk appetite, with a majority of respondents estimating the U.S. will approve a package of between $1 trillion and $2 trillion over the next six months to revive the world’s biggest economy. Congress has already approved a $900 billion aid package this week, and there are prospects of additional stimulus depending on the outcome of the Jan. 5 run-off elections for Georgia’s two Senate seats.

With the global stock of negative-yielding debt near $18 trillion, the hunt for higher returns will continue to favor emerging markets over developed peers. Total wealth in developing-nation stocks and bonds now exceeds $33 trillion, more than the economies of the U.S., Germany and Japan combined.

That total stood at $28 trillion at the start of the year, based on data compiled by Bloomberg using the market capitalization of equities from 27 nations listed by MSCI Inc. along with Bloomberg Barclays indexes of local- and foreign-currency bonds.

Higher-yielding currencies and bonds, such as those in Mexico, Brazil and India, were favored in the survey, a shift from the previous poll, when low yielders including South Korea, Thailand and Poland were preferred. The rally in junk-rated dollar bonds continued this month, sending the average yield to the lowest since February 2018, according to a Bloomberg Barclays index.

Survey participants were also asked about the outlook for inflation, monetary policy and economic growth across 12 emerging markets. Below are the charts summarizing their views:

Here is a list of the survey participants:

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