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Emerging-market watchers may be confident the rally will continue into 2021, but it’s the roll-out of vaccination programs that concerns them the most.

A Bloomberg survey of 63 investors, strategists and traders found the efficacy of coronavirus vaccines is likely to be the biggest market driver for next year, beating out worries about the fiscal laxity of governments and China’s economic growth path. China still emerged as the overwhelming favorite across currencies and stocks, while investors were most optimistic for Latin American bonds, the Nov. 18-25 poll found. Argentina remained a source of unease.

The findings underscore how the battle against the Covid-19 pathogen turned markets on their heads in the past 12 months, forcing investors to throw out the playbook and look for fresh cues for the direction of asset prices. After collapsing in the first half, emerging markets have rebounded to hand investors more than $5 trillion in wealth this year largely as vaccine breakthroughs supported risk assets. Bonds have climbed to near record highs, while benchmark gauges of stocks and currencies are at their strongest levels in more than two years.

Rankings by country
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Rankings by country

“As economies reopen, vaccines are distributed and risk appetite returns, 2021 could be a break-out year for emerging markets, especially if the U.S. dollar continues to weaken," Christopher White, a London-based co-manager of the emerging markets discovery fund at Somerset Capital Management LLP. “An unprecedented U.S. peacetime fiscal deficit combined with aggressive monetary stimulus is putting pressure on the dollar, which is very helpful for many emerging economies."

Inflation outlook
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Inflation outlook

Asia kept its top position for currencies and stocks as the region leads the recovery from the pandemic, the survey showed. Latin America, with relatively higher yields, eclipsed other regions as offering the best prospects for bonds.

The outlook for China’s economy remained one of the top three likely determinants for prices in 2021. Stimulus spending and its impact on the fiscal health of governments took the third spot as worries emerged over how much scope central banks have left to lower borrowing costs.

U.S. stimulus will remain key to risk appetite, with a majority of respondents estimating the U.S. will approve a package of between $1 trillion and $2 trillion to revive the world’s biggest economy. Crucial to reaching a bigger package than the $916 billion being discussed will be the outcome of the Jan. 5 run-off elections in Georgia’s two Senate seats.

Economic outlook
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Economic outlook

With the global stock of negative-yielding debt near $18 trillion, the hunt for higher returns will continue to favor emerging markets over developed peers. Total wealth in developing-nation stocks and bonds now exceeds $33 trillion, more than the economies of the U.S., Germany and Japan combined.

That total stood at $28 trillion at the start of the year, based on data compiled by Bloomberg using the market capitalization of equities from 27 nations listed by MSCI Inc. along with Bloomberg Barclays indexes of local- and foreign-currency bonds.

Higher-yielding currencies and bonds, such as those in Mexico, Brazil and India, were favored in the survey, a shift from the previous poll, when low yielders including South Korea, Thailand and Poland were preferred.

Survey participants were also asked about the outlook for inflation, monetary policy and economic growth across 12 emerging markets. Below are the charts summarizing their views:

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