Emerging Market equities show significant potential for a 2020 rerating. With global investors still roughly 700 basis points underweight the asset class, EM equities have remained unpopular and underinvested. This active underweight is over one and a half standard deviations below its historical average, which we believe could revert to the mean in the near future. We believe that prices have dislocated from fundamentals and that EM equities are positioned for a significant rally in the coming year. The key catalysts for this convergence should come in the form of a tepid to weaker US dollar (USD), a US-China trade resolution, and a managed Brexit.
Highlights from the 2020 Emerging Market Outlook:
EM Consumption: The rising number of middle class consumers across EM presents a unique investment opportunity based on demographics, urbanization, spending patterns, living standards, and technological leaps.
US Dollar Outlook: The US continues to grow its fiscal and trade deficits despite diminishing GDP growth. We believe that investors will pay attention to fundamentals and that some or all of these drivers could lead to a weaker USD.
US-China Trade: While a final trade deal between the US and China remains elusive, there has been strong progress and the market has grown optimistic the two countries can reach a “Phase 1” deal.
EM Fundamentals: The International Monetary Fund forecasts GDPs in DM economies to contract, and for EM rates to expand.