A positive outlook for emerging markets
If we take stock of the events of the last few months, we can see that they are on the whole very positive for emerging market corporate bonds. First of all, there was the start of the vaccination campaign, although this will certainly be rolled out faster in developed countries. However, emerging markets will benefit from the growing appetite for risk that this good health news brings. Furthermore, most emerging market economies are currently subject to far less severe health-related restrictions than those in place in developed countries, particularly in Europe. Accordingly, the slower rollout of the vaccination campaign has less of an impact.
A good illustration of this situation is the Chinese economy ending 2020 on a very positive note; the GDP growth figure for the fourth quarter, published in mid-January, stood at an annualised rate of 6.5%. This means that the Chinese economy grew by 2.3% over the year, making it the only G20 country to have experienced positive growth over 2020 as a whole. Moreover, the results of companies in emerging countries continued to exceed expectations. They were very encouraging for the fourth quarter of 2020 and we expect this to continue to be the case for the beginning of 2021. The recovery in Chinese growth and international trade are the key driving forces behind this trend.
Significant capital inflows
Another positive phenomenon has accelerated in recent weeks: capital inflows on emerging market credit are very significant. We have seen an increasingly global interest in this asset class, which will allow companies in our EM 2024 fund to benefit from privileged access to the markets, and possibly to the primary market. Naturally, these are potential opportunities for our portfolio.
The election of Joe Biden in the United States was also an important development at the end of 2020. The main conclusion we draw from this is that the political relationship between China and the United States may be less unpredictable than what we experienced during Donald Trump’s tenure. This is another favourable change, and it has been welcomed as such by the markets. However, we also do not expect total easing and full normalisation of these relations. We believe that there will continue to be episodes of volatility, with tensions in the technology sector in particular. At this stage, we do not have any exposure to Chinese companies that are wholly or partly owned by the Chinese state or by Chinese provinces, to avoid political decisions that would have too great an impact on the portfolio.
Accommodating policies
Another decisive development in 2020, and one that will be remembered for many years to come, was the activism of central banks. They supported the financial markets in the second quarter of 2020 and allowed a generalised rebound in valuations. We expect central banks to remain accommodative in 2021 and rates to remain at low levels, particularly in Europe. This is another very positive supporting factor for emerging market corporate bonds, as this will reinforce inflows into the asset class in the coming years.
The last supporting factor is the depreciation of the dollar. This is an important element when looking at the emerging market corporate bond asset class. This depreciation is notably linked to the significant stimulus packages in the United States, which are to be financed by debt issues. The consensus view is that this will continue and have a positive impact on market sentiment in terms of emerging market assets, and thus for emerging market corporate debt.
A macroeconomic point to conclude: the IMF forecasts are very telling. For 2020, emerging countries have certainly experienced negative growth, but to a much lesser extent than developed countries. This is due in particular to the fact that the manufacturing sector, which weighs much more heavily in these economies, has recovered well before the service sector. And in 2021 and 2022, again according to the IMF, the outperformance of emerging economies is expected to continue.
