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A woman wearing a face mask to protect against the coronavirus walks past a bank's electronic board showing the Hong Kong share index in Hong Kong, Thursday, Dec. 10, 2020. Stocks were mostly lower Thursday in Asia after weakness in technology companies’ shares led an overnight decline on Wall Street. (AP Photo/Kin Cheung) (AP)
A woman wearing a face mask to protect against the coronavirus walks past a bank's electronic board showing the Hong Kong share index in Hong Kong, Thursday, Dec. 10, 2020. Stocks were mostly lower Thursday in Asia after weakness in technology companies’ shares led an overnight decline on Wall Street. (AP Photo/Kin Cheung) (AP)

Year of pain sets stage for 2021’s top 10 emerging-market themes

Few themes are likely to keep dominating developing economies that collectively account for $30 trillion, or about 34% of global gross domestic product

Some risks aren’t going away any time soon for emerging markets, irrespective of the overwhelming view among investors and strategists that 2021 will be a year of continued recovery.

Though the turbulence triggered by the coronavirus outbreak has given way to optimism that vaccines and central bank largess will keep the revival on track, a few themes are likely to keep dominating developing economies that collectively account for $30 trillion, or about 34% of global gross domestic product.

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1. Vaccine Headway

After bringing much of the global economy to a halt in 2020, there’s growing optimism that multiple vaccines will help bring the pandemic under control. Yet banks such as HSBC Holdings Plc caution against too much enthusiasm as availability and distribution in emerging markets may lag behind their developed peers. Wealthier countries have secured extensive supply deals to hedge their bets, while many developing ones may have to rely on international groups that have promised to make vaccines affordable. The logistics of transporting, distributing and administering them require advanced infrastructure and medical expertise that might not be available in every country.

2. Gauging Policy Turns

Central banks in emerging markets followed their developed peers in cutting interest rates to record lows this year, together easing more than during the 2008 financial crisis. A number of them even took a page from the developed-market playbook by buying bonds. Now, as vaccines are rolled out and the risk of inflation rises, some policy makers will come under pressure to reverse course, a theme that will come increasingly to the fore in 2021, according to Jean-Charles Sambor, head of emerging-markets fixed income at BNP Paribas Asset Management in London.

3. Debt Mountain

Unprecedented stimulus in emerging markets drove debt levels to all-time highs. Brazil, for example, is spending the equivalent of 8% of its gross domestic product to counter the impact of the coronavirus. In 2021, the focus will likely turn to how such nations will pay for it all. There are already worrying signs. Moody’s Investors Service predicts Turkey’s debt burden will jump above 40% of GDP in 2020 from 32.5% last year. South Africa just had its credit ratings cut due to a worsening debt trajectory, while Colombia’s widening deficit is putting its investment-grade rating at risk. Fitch Ratings has the highest balance of net negative outlooks for European emerging markets in more than a decade, while Oxford Economics says rising government debt will slow Latin America’s recovery.

4. Biden’s Pivot

Emerging-market assets have been bolstered by Joe Biden’s victory in the U.S. presidential election, but concerns are growing that his administration may be less than positive for many developing nations in the longer run. Russia’s ruble slumped in the run-up to the U.S. polls as investors feared a harder crackdown under a Biden administration. Turkey’s Recep Tayyip Erdogan, who Biden has reportedly called an “autocrat," and Saudi Arabia’s King Salman bin Abdulaziz are also preparing for a tougher time. The new president would probably pursue sanctions relief for Iran in the first half of 2021 in exchange for a freeze on nuclear activity, while ratcheting up the rhetoric against countries including Saudi Arabia, Israel and Egypt, according to Eurasia Group.

5. Rise of China

China has led the global recovery from the coronavirus, becoming the only major nation to see growth this year, and is widely forecast to continue driving the rebound in 2021. State Street Global Markets and JPMorgan Asset Management are among those predicting a Biden administration will take a softer stance on trade with China, burnishing the investor appeal of the Asian export powerhouse. At the same time, China’s gathering economic strength may embolden it further on the global stage, exacerbating geopolitical tensions.

6. Political Risks

The year 2020 saw an upsurge in domestic political turmoil among developing nations, a trend that remains a key risk next year. Pro-democracy demonstrations in Thailand threaten to snuff out the prospect of a consumption-led recovery, according to Maybank Kim Eng Research. In neighboring Malaysia, Prime Minister Muhyiddin Yassin, having narrowly survived a leadership test, is under growing pressure to call an election. In Europe, Poland has been racked by protests over abortion rules. And in Latin America, Chile will embark on the process to rewrite its constitution as Peru’s government works toward stability after the unexpected ousting of Martin Vizcarra triggered a wave of street protests.

7. Latin America Restructuring

Latin American debt woes ratcheted up several notches in 2020. Argentina and Ecuador reached accords with bondholders, but the euphoria didn’t last long. Argentine bonds have tumbled on concern over the government’s ability to reignite economic growth, and the country’s negotiations with the International Monetary Fund will continue to be a focus next year. Ecuador’s debt has also swooned on speculation leftist candidate Andres Arauz may win next year’s presidential vote, a prospect Amherst Pierpont Securities LLC says will fuel price volatility in early 2021.

8. Spotlight on Turkey

Turkey had its fair share of headlines in 2020 as the lira depreciated more than any peer except the Argentine peso. Authorities resisted rate increases until November, when President Erdogan, after firing the central bank governor, allowed his replacement to raise the benchmark interest rate by the most in two years. While Erdogan has pledged to pursue more market-friendly policies, investors will be waiting for further proof that the change of stance is real. Goldman Sachs Group Inc. says more policy tightening is necessary to restore confidence. Recent U.S. sanctions are hardly helping sentiment.

9. African Distress

A backwater of the emerging-market landscape took on fresh significance in 2020 as a debt crisis erupted in Zambia, a reminder to investors of the financial strains in the world’s poorest continent. After borrowing heavily since 2012, Zambia became the first in Africa to default during the pandemic after bondholders refused to grant it an interest-payment freeze. The government is in talks with the IMF and has pledged to restore budget credibility. Carmen Reinhart, the World Bank’s chief economist, sees many low-income economies and several emerging markets at risk.

10. Ethical Investing

Investments linked to environmental, social and governance criteria took a step toward the mainstream this year and are set to gather pace in 2021. ESG-focused stocks and bonds fared much better then traditional peers amid the coronavirus sell-off. Governments and companies across the developing world have this year sold an unprecedented amount of so-called social bonds -- debt securities whose proceeds are used to address human needs. With China making a new pledge to address climate change, and Joe Biden an outspoken supporter of environmental initiatives, low-carbon and fossil-free assets may outperform next year, according to Bloomberg Intelligence.

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