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EM has underperformed DM equities YTD reflecting EM countries’ idiosyncratic factors and core global risks emanating from the exceptionally strong US.
MSCI EM has been up >5% on year to date so far vs S&P 500 up >12% year to date so far. Investors expect a gradual transition from a high economic growth / low-interest-rate equilibrium to one of yet high growth but higher interest rate & as vaccinations pick up and the reopening takes place, EMs are expected to restore GDP growth premium versus US GDP by Q421.
Pedro Martins Junior, CFA who is EM equity strategist at JP Morgan says three possible drivers to make the relative case of EM/ DM equities more compelling into H2’21 with 3 reasons.
- The phase-out of US exceptional strength as EM restores GDP growth premium versus US GDP by Q4’21;
- Higher commodity price tailwind for EM exporters through stronger growth and improvement in fiscal and current account balances;
- Favorable positioning as a reversion to the historical average allocation of global investors to EM would represent the additional flow of funds of US$442 billion.
JP Morgan has increased MSCI EM 2021 year-end target to 1,550 from 1,450 driven by a stronger earnings outlook with positive EPS revisions continue following a strong Q1’21 season and uplift to EM GDP growth estimates.
Speaking about Indian equities have been remarkably resilient which is up 13% year to date. Nifty trading at an all-time high of 15,800+ levels. As India’s second wave abates, states are using a more decentralized and data-driven approach to unlock.
Markets in India have been lifted by the global tide and have ignored potential near-term economic and earnings risks. However, the expectations-reality gap appears unfavorable near term with underlying market dynamics has been deteriorating for some time.
JP Morgan says Indian banks should do well relative to the market if that happens & prefer ICICI Bank, HDFC Bank, and SBI. In India, JP Morgan overweight Asian Paints, Aurobindo Pharma, Bajaj Auto, ICICI Bank, Infosys, L&T, Marico, SBI Life, and Tata Steel.
