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2021: Reviewing a 'Contrarian' Year for Emerging Market Equities

2021: Reviewing a 'Contrarian' Year for Emerging Market Equities

It is accepted that EM equities had a very poor 2021 relative to expectations. MSCI EM fell by 4.6% in 2021 (all data in USD) despite an improving global economy, significant developed market liquidity support and fairly cheap valuations. 

We also know the main reasons for this weakness, especially relative to DM (see below): i) China (-22.8%): the regulatory crackdown on the tech sector and weakness in commercial property; ii) a rising dollar; iii) higher interest rates in many EM.

However, if we dig deeper there are some extraordinary market data for 2021, as my friend Steve Derkash also noted in a recent post:

1. With MSCI EM down 4.6% in 2021 and DM up 20.1%, this was the worst relative year for EM v. DM (-2470bp) since 2013 (the 'taper tantrum year) and, before then, since 1998 (Asia, Russian crises), 1997 (start of the Asian crisis) and 1995 (aftermath of the Mexican peso devaluation of December 1994);

2. As I argued all last year, most of this EM underperformance was down to two markets - China and the US. EM ex-China rose 7.3% in 2021, while DM ex-US rose 10.1%, a gap of 'only' 280bp;

3. The parallels with the taper tantrum year of 2013 should not be taken too far, despite very similar performance data - in 2013: EM: -5.0%; DM: +24.1%. As noted above, the poor 2021 for EM had much more to do with China than with a fear of rising US bond yields;

4. 2021 was the first year since 2014 that MSCI EM fell (also -4.6%) when DM rose (only +2.9%) and the first down year for EM since 2018 (-16.6%);

5. The country/regional data are even more remarkable. In 2021, despite EM falling -4.6%, only 10 of 25 index markets actually fell; the declines were led by Turkey (-31.2%), Brazil (-23.5%) and China (-22.8%). Korea - another big market - fell by 10%; the big winners in 2021 were Czech Rep. (+49.3%), UAE (+42.7%), Saudi Arabia (+34.3%), Kuwait (+27.9%), India (+25.1%) and Taiwan (+23.5%);

6. By contrast, in 2020, despite EM gaining 15.8%, ONLY 5 of 27 markets (Argentina and Pakistan were kicked out of the EM index during 2021) actually ROSE, led by Korea (+42.6%), Taiwan (+37.2%), China (+27.3%), India and Argentina (!);

7. In 2021, every EMEA market rose (except Turkey), with MSCI EMEA gaining 14.3%, compared to 2020 when EVERY EMEA market fell and MSCI EMEA fell 9.8%. Latin America fell in both 2021 (-13.1%) and 2020 (-16%). The only Latam market to rise in 2021 was Mexico (+19.5%), after Argentina was the only regional gainer in 2020;

8. In 2020, MSCI EM was driven higher by the big four Asian markets; China, India, Korea and Taiwan rose by 30% on average. In 2021 only Korea and India of these four gained.

9. Only two EMs rose in both 2020 and 2021: India and Taiwan. Only five fell in both years: Brazil, Chile, Colombia, Peru, Thailand.

2021 was a contrarian year for EM. What does this mean for 2022?

Written by Geoffrey Dennis

 Geoffrey is the Former Head of UBS Global Emerging Markets Strategy


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