New Covid-19 cases and varying vaccination rates across the globe could also create volatility for global equity markets. On a related note, incrementally better news out of the U.S., combined with incrementally worse news elsewhere, has led to a recent strengthening of the U.S. dollar. This is likely to create near-term headwinds for emerging markets.
Best Ideas
Increased economic reopening and recent underperformance have created opportunities in U.S. small caps. We favor consumer service sectors, especially in areas where unemployment remains elevated, and we are keeping an eye on industrials that could benefit from publicly funded infrastructure. Tactical opportunities remain in technology and growth stocks, but with a high degree of selectivity, as the “shelter-in-place” trade may no longer provide a broad benefit to all companies. We also remain bullish on emerging markets over the long term, as efforts to stem the spread of the virus eventually take hold.
In Focus: Tailwinds For Emerging Markets Equities
Though global equities may appear overvalued when compared to their own history, relative valuations appear to favor emerging markets: Per FactSet, EM equities are currently trading at a 25% discount versus their historical relationship with U.S. equities. Several important tailwinds reinforce this point:
1. Strong growth from China
2. A weaker U.S. dollar
3. Possible incremental improvements in geopolitical outlooks.
4. A widening growth gap with EM earnings per share 10% higher than in the U.S.
It is also worth considering the duration and magnitude of the cyclical relationship between U.S. and EM equities. During the decade ending in 2019, U.S. equities outpaced EM by approximately 750 bps, on an average annual basis. In contrast, EM equities outperformed the U.S. by 1,250 bps per year during the prior decade (2000- 2009). 2020 may have been a transition year, as emerging markets kept pace with the U.S. and outperformed significantly in the fourth quarter.
Though several EM countries continue to struggle amid the pandemic, we are optimistic that the global economy will eventually follow a similar path to recovery as the U.S. As a result, we believe this is a good time for investors to consider evaluating their exposure to emerging market equities given their solid prospects.
Saira Malik is head of global equities at Nuveen.