China Lags as Thailand, Russia Rank Top Emerging Market Picks

Thailand and Russia are well placed to be among the emerging-market standouts that could beat expectations next year.

That’s according to a Bloomberg study of 17 developing markets gauging their outlook for 2021 based on 11 indicators of economic and financial performance. Thailand topped the list, owing to its solid reserves and high potential for portfolio inflows, while Russia scored No. 2 thanks to robust external accounts and a strong fiscal profile, in addition to an undervalued ruble. China scores fairly poorly given that high expectations are already baked in, while Brazil is a laggard due to a mounting fiscal deficit and debt concerns.

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Note: Latest data as of Dec. 10.

Many emerging market economies are poised to recoup economic losses, judging by various metrics surveyed by Bloomberg. Healthy foreign reserves, particularly in Asia, provide a cushion for external shocks, but elevated debt-to-GDP readings will be worth monitoring for stability risks.

Developing-nation assets are heading for a back-to-back winning year, thanks to unprecedented monetary and fiscal stimulus deployed to fight the pandemic. As the global recovery takes hold, and the Federal Reserve keeps interest rates low, risk appetite should continue to strengthen in 2021 amid favorable valuations and attractive real yields that lure foreign buyers.

To help pick apart which emerging markets will handle those challenges and opportunities better than their peers, here’s a deeper look at our scorecard metrics:

Covid Growth Healing

There remains a worry especially among poorer, less-developed countries that they’ll be left behind in global vaccination distribution, with producers in the U.S. and U.K. garnering much of the attention in their virus-ravaged economies. And emerging markets have certainly taken their share of hits to Covid-era growth, including those like Thailand that are especially dependent on tourism.

That said, Bloomberg surveys show that analysts are penciling in high rates of growth next year for some of those that have been hardest-hit in 2020. Each of the top five growth rates for 2021 are from Asia, led by India, China, and the Philippines.

What Bloomberg Economics Says:

“The depth of the pandemic recession and the speed of recovery from it differ widely across emerging markets. Countries that manage to contain the outbreak, introduce large stimulus, have low exposure to the hardest-sectors and aren’t reliant on foreign capital will fare better.

China and Turkey are already at their pre-virus peak, although the latter relied on an unsustainable credit boom. India should get there by 1Q21. Chile and South Korea won’t be far behind—we expect them to catch up mid-2021.”

-Ziad Daoud, chief emerging markets economist. Click here for the full report.

Lockdown Relief

Goldman Sachs Group Inc.’s effective lockdown indexes indicate that once the pandemic is under control, most developing economies stand to gain a lot in terms of activity catchup. Those indexes should all eventually converge close to zero.

In the latest readings here, Malaysia, Chile, and the Philippines have the most room to subside in 2021.

Structural Vulnerabilities

Structural weaknesses that worsened amid the pandemic also pose risks to emerging markets. Current-account deficits, notably in Colombia and Turkey, mean these countries are vulnerable to a negative shock.

Fiscal deficits, especially in Brazil, South Africa and the Philippines, have added to high government debt burdens. The debt burdens in South Africa, Hungary, India, and Brazil are also cause for concern.

Favorable Valuations

Judging current real-effective-exchange rates (REER) versus their five-year averages, Brazil, Turkey, Hungary and Malaysia are especially undervalued compared to the average of their peers. They each notch z-scores of negative 1.4 or below.

China’s central bank will be watched closely for any signs of resistance to a stronger currency. With China’s valuation the third-highest in our basket, there’s room for an unsettling fall.