An interesting note out last week from the global emerging markets research team at HSBC. To repeat, I’m still very bullish about EM assets even after the recent run-up. My sense is that these assets – especially BRICs less China – offer real diversification benefits. Overall I have about 15% exposure to EM assets as of today.

Unsurprisingly the HSBC team is largely optimistic, but not oblivious to the ‘perils’ of investing in developing markets. Their core contention is that we should experience “a China-led recovery, an improving global cycle and ample liquidity”, all of which “is a powerful mix that gives support to EM…on balance, the window of opportunity is still open in growth assets; i.e. EM equities and FX but we stay vigilant on risks

Six positives

“We see six trends driving gains across EM, and we take a more detailed look at these in the report:

  1. Upside growth risks and a global, China-led recovery
  2. Ample global liquidity from developed market central banks
  3. An acceleration of non-resident capital flows. We forecast these could nearly double to USD1.0trn in 2021, while the portfolio positioning in local currency assets does not look crowded
  4. We expect a brighter outlook for EM FX, reversing a nearly seven-year weakening trend
  5. Leaner external imbalances, although the USD770bn in foreign currency debt coming due in 2021 could create risks for some economies
  6. EM valuations are not stretched when compared to DM

Four perils

  1. “COVID-19 setbacks, in terms of the vaccine or new strains of the virus
  2. EM’s risk premium cushion is very low (if not negative in terms of real rates), leaving it vulnerable to any premature pullback in global liquidity
  3. The unprecedented monetary and fiscal loosening of 2020 leaves very limited room for additional policy support
  4. Inflation risk cannot be overlooked for EM, with rising food prices a particular concern”.

One potential tailwind behind some emerging market stocks could be the Tesla effect i.e investors start to look at new geographies and businesses that might benefit from the next generation grid and electric cars. On this note London based India research house Lalcap reports on the Indian angle for Tesla enthusiasts.

“Elon Musk, chief executive of U.S. car maker Tesla has tweeted several times in recent years, including as recently as October 2020, about his wish for Tesla to enter India. Tesla is Musk’s electric car brand and the surname of inventor and engineer Nikola Tesla, for whom the auto and energy company was named after;

 PM Modi met Musk in September 2015 at Tesla’s headquarters in Palo Alto, California, and invited Musk to set up manufacturing in India.

Tesla Motors India and Energy Private Limited was incorporated on 8 January with its registered office in the southern city of Bengaluru, which has attracted several global technology companies there.

 PM Modi is promoting the production and use of electric vehicles to reduce the country’s oil dependence and cut down on pollution. Progress is slow due to a lack of investment in manufacturing and infrastructure such as charging stations;

India is drawing up plans how to offer incentives for companies to manufacture advanced battery manufacturing facilities.”

The Good Judgement Project

We’ll finish today with the Good Judgement Project, a fascinating experiment in putting super forecasters to the test. The project boasts a bunch of crystal ball experts who are willing to put their hunches for the next year on the line. You can see the longer description of their 2021 predictions  HERE

The predictions fall into one of three categories:

* Safe But Not Boring (events that are 75% or more likely to happen in 2021)

+  Coin Flip (45% – 55% likelihood of happening in 2021)

  • Long Shot (5% – 25% likelihood of happening in 2021)

For me the most interesting section – apart from the inevitable CoVid projections – centres on economic projections for the US economy which will largely depend on Americans’ decisions regarding inoculation, masks, and social distancing. Given that the Kent strain of the virus is now building momentum I’d suggest that most predictions need to be moved down a notch…

+ One Superforecaster gives even odds that Americans will continue to ignore these measures, which would erode the economy into a recession.

– Another Superforecaster pins hopes on inoculation to enable a rapid recovery in the services sector in the second half of the year and a drop in unemployment under 4%.

+ Fed is expected to keep interest rates near zero, and there should be a major stock market correction (20 pct +) in 2021.

+ Will inflation in Q3 exceed 2%? It’s a coin flip.

* Meanwhile in the UK, employment and GDP should remain lower than in 2019, and UK car production is expected to drop below the 2019 level.

*At some point during the year, the British pound and euro should trade at 1:1. Another Superforecaster predicts the euro and Chinese yuan should end 2021 stronger versus USD.