Page 18 - ISQ January 2021

INVESTMENT STRATEGY QUARTERLY

2021 International Outlook: Younger

Economies Catching Up

Giampiero Fuentes, Investment Strategy Manager, Investment Strategy

The blackest of ‘Black Swan’ events — COVID-19 has domi- such as Technology and Communication Services. These sectors
nated the 2021 global equity market narrative. However, combined have over 25% more exposure in the S&P 500. Second,
a strengthening euro could potentially hamper earnings growth
despite negative earnings growth across the globe, equity
as many of the largest companies in Europe are reliant on exports.
markets have rebounded from their early-year lows and ral- Third, politics remain a threat to the European economic recovery.
lied into positive territory. Aggressive policy actions and Elections in both Germany and Italy in 2021, and in France in 2022
optimism over effective vaccines have catapulted the equity will likely increase volatility in the euro zone.
market higher. Can emerging markets outperform in the upcoming year? Assuming
the global pandemic fades and the global economy accelerates,
So what will the next year hold for global equity investors? Global emerging market equities could be a big beneficiary. Asian equities
equities should remain well supported by a significant rebound in have been the best performing regional equity market in 2020 as
economic growth around the globe. Fostering economic growth they were impacted by the pandemic earlier in the year, and dealt
is continued aggressive policy action. For example, in Europe, the with it in a remarkable way that allowed both their economies
European Central Bank has confirmed that it will persist with its asset and equity markets to promptly rebound. Asian emerging markets
purchase program until at least March 2022, and agreed to a €750 offer great opportunities as the region has over two-thirds of its
billion emergency relief package forming part of the forthcoming market capitalisation in our favourite sectors which, together with
seven-year, region-wide €1.8 trillion budget package.
our expectation of a declining dollar and secular trends such as
So does that mean that Europe will outperform the US for the first demographics (younger population, wealth creation), should propel
time since 2015? We believe that remains an uphill battle on three their equities higher. Commodity-based emerging markets could
fronts. First, our favorite sectors favor US equities. In fact, one of benefit as well if commodities such as oil and industrial metals
the more heavily weighted sectors in European indices is Financials continue to move higher.
(currently neutral), which tend to be negatively impacted by nega- Ultimately, we continue to favour the US over international, but
tive interest rates that are expected to persist. Similarly, Europe has emerging market Asia seems to be the clear runner up.
little exposure to sectors that benefit from the current environment,

18 International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability.
These risks are greater in emerging markets.