August 22, 2021
Emerging-market equities are sitting at the center of a sharp valuation debate. In the decade after the global financial crisis, MSCI’s emerging-market stock index gained just 8%, while the developed-market benchmark more than doubled. The gap has widened again in 2021, with developed-market stocks returning about 14% since the start of the year while emerging-market stocks fell 5%. That is the core tension: cheap markets with improving earnings and commodity support are still being discounted for China, vaccination delays and possible Fed tapering.
For investment banking candidates, this is exactly the kind of cross-asset setup that can turn a markets interview from generic commentary into a real discussion of cause and effect.
Commodities Meet Cheap Valuations
Goldman Sachs, Bank of America and Lazard Asset Management see room for emerging-market equities to recover as vaccine rollouts improve and the global economy continues to normalize. Elevated commodity prices are central to the bullish case, especially for markets such as South Africa, Russia and Brazil. Infrastructure demand from China to the United States has helped keep raw materials supported, while inflation and stronger capital spending can flow through to earnings for producers and supply-chain companies.
BofA noted that equity flows into emerging markets in Eastern Europe, the Middle East and Africa have accelerated since March, beating flows into bond funds by the widest margin since 2014. Its cross-asset strategist Jure Jeric expects supportive macro drivers and valuations to keep that trend alive. Energy has already helped Russian equities, but BofA also sees scope for more demand in financials and materials, with South Africa benefiting from the latter.
Goldman’s Caesar Maasry is tactically upbeat on developing-market stocks and favors equities and currencies in Brazil, Mexico and Russia. His argument is direct: a return to normalcy is not fully reflected in prices. That is a reasonable market view because the prior decade’s underperformance was not only about weak sentiment; it was tied to slower Chinese growth, softer commodities and weak earnings growth.
China and Tapering Still Matter
The bullish case is not clean. China represents almost one-third of the MSCI emerging-market index, and Beijing’s regulatory crackdown on technology companies has weighed heavily on the broader gauge. Goldman expects the regulatory pressure to remain more China-specific, but it also says concerns about Chinese growth are warranted.
Franklin Templeton points to technology as another emerging-market driver, especially in South Korea and Taiwan, whose tech-heavy markets held up better during the pandemic. Lazard also argues that emerging-market companies tied to global supply chains should benefit when worldwide capital spending improves. Still, developed nations outside North Asia remain a higher-conviction holding for Goldman than the MSCI EM index itself.
The biggest macro risk is the Federal Reserve. Emerging-market equities weakened after Fed minutes suggested stimulus could be pared later in the year, and the dollar’s strength added pressure by weighing on commodities. BlackRock moved emerging-market equities to neutral, citing uncertainty around the dollar and tighter policy. Wei Li warned that slow vaccinations and limited policy room could leave emerging economies with more lasting growth damage.
The opportunity is real, but so is the sequencing risk. If vaccines improve, commodities stay firm and earnings recover, emerging-market equities can finally narrow the gap with developed markets. If China growth slows further or the Fed tightens into fragile recoveries, cheap valuations alone may not be enough.