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  • 2020 tested emerging markets to their limits, but most emerged with their economic growth trajectory intact
  • A new administration in the US and a shifting relationship with China are likely to prove important this year
  • Economic recovery should hopefully be stronger in emerging markets, but governments will need to withdraw the safety blanket of support with care

 

The world is slowly emerging from a devastating year that tested emerging market governments, policymakers and companies to their limits. The landscape in 2021 may look quite different to the world we left behind at the end of 2019, before the Covid-19 pandemic hit.

While 2020 has shown the difficulties of predicting the future, we believe a number of themes are likely to dominate in emerging markets this year.

 

A changing relationship with China

 

China and the US are engaged in the long-term process of redrawing their relationship. While President Biden is likely to be more measured in his approach to US/China relations, the thrust of policy will remain the same. Neither country is likely to grant unfettered access to their markets, with implications for businesses on both sides.

China is likely to become more self-reliant as a result. Pruksa Iamthongthong, investment manager on Asia Dragon Trust, believes this is happening already as the country adopts its own ecommerce practices, technology innovation and advanced semiconductor manufacturing. She adds: “This self-reliance is particularly important in terms of the restrictions we’ve seen from the US on Huawei, which have cut China off from advanced semiconductors.” (The US government now requires any manufacturer selling products to Huawei to get a license). This self-reliance should be good for companies in the region with the right capabilities.

 

A new broom in the US

 

While the new US administration is unlikely to take a materially different approach to its predecessor on China, it may adopt a markedly different foreign policy elsewhere.

Joe Biden has been a long-term ‘friend’ to South America, particularly during his vice presidency, and is likely to shift the approach that prevailed under the Trump administration.

More generally, the outcome of the US election and greater global stability could contribute to a weaker Dollar. This has implications across emerging markets. Andrew Lister, investment manager of Aberdeen Emerging Markets Investment Company, says: “The past decade of a high Dollar has undoubtedly contributed to a challenging period for the asset class. The Dollar is now back to where it was in 2001, which presents a much better base for emerging market currencies and stock markets to deliver returns for investors.”

 

The green revolution

 

This is likely to be every bit as important in emerging markets as it is in developed markets, not least because this is where climate change hits hardest. China has now committed to carbon neutrality by 2060. Pruksa says: “China currently makes up 28% of global emissions and 85% of its energy mix is still in fossil fuels. Should this ambition from China be realised, we are likely to see huge growth in renewable energy – across wind, solar and electric vehicles.”

 

Economic recovery

 

The recovery across emerging markets is likely to take root in 2021, not least because many countries have not been as hard hit by the virus as developed countries. Andrew says: “China has proven it has dealt with the pandemic adeptly. Taiwan and Korea have also done well by using technology and short, sharp lockdowns.

Economies are now returning to normal. GDP growth in China is likely to be positive this year and similar strength has been seen across emerging markets.

“Today, we see a much smaller contraction in emerging economies’ GDP and, looking into 2021 and beyond, economists are forecasting more rapid growth for these countries. Non-China emerging markets should account for almost half of global growth within five years.” By 2025, 80% of the world’s growth could be coming from emerging markets.

This could be a better time for some of the unloved assets in emerging markets. Aberdeen Emerging Markets Investment Company, for example, holds a significant overweight position in frontier markets.

Andrew believes they offer exciting growth potential at low valuations. While the trust still has significant weightings in ‘old school’ emerging markets – notably India and China – he believes the frontier market exposure should add a layer of dynamism in a recovering world.

 

Withdrawing the government safety blanket

 

Governments and central banks have eased the pain of the pandemic with unprecedented monetary and fiscal stimulus. While this has worked to support economies across the globe, it is unsustainable in the longer-term and countries must start to adjust to life without it.

Emerging markets should emerge with a lighter debt burden than many Western nations. They haven’t been able to borrow as readily, which has been hard in the short-term, but should support growth in the longer-term. Pruksa believes that interest rate levels still give some room for flexibility.

 

Technology adoption

 

The pandemic has forced broader technological adoption across emerging markets, as it has elsewhere. Online services and internet names experienced a huge acceleration in 2020, often leap-frogging many years of development.

The so-called ‘tech enablers’ – such as semiconductor companies that support the roll-out of 5G – are also likely to be crucial in the new world that emerges from the pandemic. Pruksa has been topping up on these areas within Asia Dragon Trust.

These are the trends as we see them today. However, we remain alert to potential changes as the world recovers from a tumultuous year. We hope for a less eventful 2021,but will be prepared for whatever it holds.

 

Important information

 

Risk factors you should consider prior to investing:

  • The value of investments and the income from them can fall and investors may get back less than the amount invested.
  • Past performance is not a guide to future results.
  • Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
  • The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
  • The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
  • The Company may charge expenses to capital which may erode the capital value of the investment.
  • Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.
  • Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
  • There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
  • As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
  • The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
  • Certain trusts may seek to invest in higher yielding securities such as bonds, which are subject to credit risk, market price risk and interest rate risk. Unlike income from a single bond, the level of income from an investment trust is not fixed and may fluctuate.
  • With funds investing in bonds there is a risk that interest rate fluctuations could affect the capital value of investments. Where long term interest rates rise, the capital value of shares is likely to fall, and vice versa. In addition to the interest rate risk, bond investments are also exposed to credit risk reflecting the ability of the borrower (i.e. bond issuer) to meet its obligations (i.e. pay the interest on a bond and return the capital on the redemption date). The risk of this happening is usually higher with bonds classified as ‘subinvestment grade’. These may produce a higher level of income but at a higher risk than investments in ‘investment grade’ bonds. In turn, this may have an adverse impact on funds that invest in such bonds.
  • Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

 

Other important information:

Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments.

Find out more at www.aberdeenemergingmarkets.co.uk and www.asiadragontrust.co.uk or register for updates  here.

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