What’s Next for Emerging Markets Equities

The recent rally in emerging market (EM) equities is attributed to three primary factors:

• The normalization of life and easing of lockdowns, particularly in Asia, with conditions significantly improved compared to March.
• Implementation of strong fiscal stimulus across various government sectors in EM countries.
• Resilient corporate earnings supporting current valuations.

Structural growth stories, particularly in e-commerce and online sectors, have seen accelerated momentum:

• E-commerce penetration in Latin America was at 5% pre-pandemic, compared to 15% in the US and 20% in China.
• Online penetration in Latin America is projected to double to between 10% and 15% within the next five years.

The emerging markets universe is characterized by high diversity across more than 25 countries with distinct political and economic models:

• Examples range from China's command economy and India's 1.3 billion-person democracy to small, open economies like the Czech Republic and developed-market-like economies such as Chile.
• There is no single "emerging market middle class"; instead, there are distinct pockets of growth and consumer trends across regions.

Global supply chain dynamics are shifting due to pre-existing US-China trade tensions and pandemic-related re-evaluation:

• Capacity relocation from China is occurring primarily into other emerging market countries rather than developed ones.
• Mexico has emerged as a key beneficiary of manufacturing capacity relocating from China over the last two years.

The fintech and payments sector shows emerging markets holding a definitive lead over developed markets:

• China and India are currently ahead in terms of company count, user base, and growth projections.
• Latin America is rapidly catching up in payments and fintech activity.
• Fintech is viewed as critical for improving financial intermediation for unbanked and underbanked populations, serving as a mechanism for poverty alleviation.

Forward-looking investment perspectives for the coming months focus on earnings growth and valuation gaps:

• Analysts project an average of 7% to 8% earnings growth for emerging markets in dollar terms when averaging 2020 and 2021 figures.
• Recent earnings are expected to decline significantly this year, followed by a robust recovery next year.
• Despite near-term volatility, EM equities trade at a discount to historical levels and developed market valuations.
• Goldman Sachs maintains a positive outlook, anticipating that specific companies in their portfolio will achieve earnings growth exceeding the 7–8% regional average.