The New Drivers Behind EM Equity’s Remarkable Rebound

Like most risk assets, emerging market (EM) equities were hit hard by the pandemic, but they’ve made a remarkable rebound. From the low on 23 March 2020 to 18 June 2021, the MSCI Emerging Markets Equity Index gained 80%.[i] The rebound has been widespread and includes some of the worst-hit countries, like India. So what helped EM equities recover so strongly despite the lingering pandemic? I think it’s a combination of new technical, macro and micro drivers that could give this recovery some staying power. I’ll take a closer look at these drivers below.

1) The world is awash in liquidity

I believe tremendous liquidity has been a main technical driver behind the EM recovery. The sheer size of the added liquidity after the COVID-19 crisis has been enormous. In 2020 alone, the G3 central banks (the Federal Reserve, European Central Bank and Bank of Japan) injected about $8 trillion into the global financial system. They’re expected to continue buying about $250 billion of assets per month through the end of 2021. Compare that to the $2.4 trillion the G3 banks injected in the two years following the global financial crisis.[ii] Looking ahead, I think central banks will take a measured approach in removing this liquidity—a lesson learned from the taper tantrum of 2013. I also think the timing will be later than what markets expect, primarily because there’s still a lot of uncertainty in global markets related to vaccinations, unemployment and the demand recovery.

We’ve also seen many EM central banks injecting liquidity. They’ve been conducting open market operations, buying bonds and providing forward-looking guidance. I believe these liquidity injections should continue over the short to medium term as many EM economies like India and Brazil are still in the throes of the pandemic and their economies still have a significant amount of slack.[iii]