Outlook on
Emerging Markets
Summary
• Emerging markets equities tracked developed markets higher
in the first quarter. As momentum built for the $1.9 trillion
COVID-19 relief package and vaccinations increased sharply
in the US, forecasts for both US and global growth were
revised significantly higher.
• Our outlook for emerging markets equities remains positive,
although interest rates remain a factor to watch. When bond
yields rise gradually due to strong growth, emerging markets
equities can outperform, particularly traditional value
securities. Should yields rise sharply and suddenly, the asset
class may weaken, as we witnessed in March.
• In emerging markets debt, first quarter performance largely
reflected the sharp rise in US Treasury bond yields. What
had been a gradual march higher in yields since August 2020
accelerated significantly and ignited a broad-based sell-off in
fixed income markets.
• We maintain a positive secular outlook on emerging markets
debt, but we believe the prudent move is to adopt a more
conservative stance and patiently await opportunities to add
risk at better valuation levels.
Equity
Emerging markets equities overall tracked developed markets higher
in the first quarter as global growth expectations for 2021 increased.
In the end, the MSCI Emerging Markets Index underperformed with
a return of 2.3% compared with the MSCI World Index at 4.9%.
Regional performance showed greater differentiation: Europe, the
RD12136
APR 2021
Middle East, and Africa (EMEA) gained the most, returning 8.1%
and led primarily by Russia as oil prices climbed higher over the first
quarter; Asia, which returned 2.2%, was almost on par with the MSCI
EM Index, buoyed by Taiwan and India; and Latin America, still
dealing with COVID-19 outbreaks and lack of vaccine supplies, lost
5.3%.
In a classic “January effect,” the start of the year resembled 2020: low
interest rates, anticipation of higher growth when the COVID-19
pandemic subsides, and growth stocks leading the way in a generally
rising market. As momentum built over February for a $1.9 trillion
US fiscal COVID-19 relief package and vaccinations increased sharply
in several countries, notably the US, forecasts for US and global
growth were revised significantly higher, and equities enjoyed a few
weeks of strong gains. By mid-February, however, US Treasury bond
yields had moved abruptly higher, a reminder that rising rates typically
accompany strong growth expectations, and stocks bobbed up and
down mainly in reaction to rate movements. Over the quarter, central
banks in Brazil, Russia, and Turkey also lifted policy rates in efforts to
get ahead of building inflation risks.
Our outlook for emerging markets equities overall remains positive
in anticipation of a stronger rebound in global growth over 2021.
Interest rates remain a factor to watch closely, however. The yield
on the 10-year US Treasury bond has risen steadily since August last
year, from 0.5% to 1.7% by the end of March. During this time,
emerging markets equities continued to push higher (Exhibit 1).
In fact, when yields are gradually rising due to a strong recovery in
 2

Exhibit 1 Exhibit 2
Emerging Markets Equities and the US 10-Year Treasury Population Vaccinated vs. Population Covered by Vaccine
Yield: One Year after the March 2020 Low Doses Purchased
Index 100 = 23 Mar 2020 YTM (%) (%)
200 2.0 0 5 10 15 20 25 30 35 40
MSCI EM [LHS] 10Y US Treasury [RHS] UAE*
Chile
175 1.6 UK
US
Hungary
150 1.2 Singapore
Turkey
Switzerland
125 0.8 Spain
Italy
France
Poland
100 0.4 Germany
4/20 5/20 6/20 7/20 8/20 9/20 10/20 11/20 12/20 1/21 2/21 3/21
Canada
As of 23 March 2021
Czech Republic
Brazil
Source: FactSet, MSCI Argentina
Russia*
China*
Hong Kong Population Vaccinated [Top]
economic growth, emerging markets can outperform, particularly the Mexico
India Population Covered** [Bottom]
economically sensitive, traditional value securities, such as materials, Indonesia
energy, and financials. However, should the increase in yields become Colombia
Peru
too sharp and sudden, the asset class may weaken, which we witnessed Korea
Malaysia
beginning in mid-February, particularly many of last year’s winners: Australia
growth securities in technology and internet-related industries. New Zealand
Kazakhstan
Apparently in anticipation of that possibility, many growth stocks with Japan
Ukraine
elevated valuation levels around the world retreated when rates rose in South Africa
Philippines
the latter part of the first quarter while value stocks gained. The MSCI Thailand
EM Growth Index rose 0.6% in the first quarter, compared with a Vietnam
Taiwan
gain of 4.1% for MSCI EM Value. As the recovery takes hold in the
0 150 300 450 600
second and third quarters, we expect value to continue to narrow its (%)
long-term underperformance to growth.
As of 25 March 2021

COVID-19 and Vaccination: Still Dominant *Exact number of doses purchased is not known. Note that China and Russia manu-
facture their own vaccines.
For most emerging markets, vaccination against COVID-19 remains **Adjusted for vaccine doses required
a story for the second half of this year and into 2022. Since late Source: UBS, UBS Evidence Lab

January, projections for the percentage of people in the developed

markets to be vaccinated in 2021 have increased from 38% to 72%,
but for emerging markets, that share has risen from only 5% to 28%.1
Globally, we are now on track to inoculate 36% of the population in
2021, and there were large increases in some of the most populous EM
countries. For example, in China the percentage of people vaccinated
increased from 11% to 32% and in Russia from 14% to 54%. Lack
of adequate vaccine supply in emerging markets, the large purchases
of vaccine doses by developed markets, and a late start to vaccinations
in Asia explain much of the gap between emerging and developed
countries (Exhibit 2).
However, the vaccine rollout in developing countries should improve
as these countries acquire more supply in the second half of this year.
COVAX, a global initiative led by the World Health Organization
(WHO) and the GAVI Alliance, has committed to distributing
a group of vaccines equitably among developed and developing
countries, with the goal of supplying 2 billion doses (vaccinating 1
billion people) by the end of 2021. It began distributing vaccines in
late February in Africa and despite some delays in manufacturing and
exports, delivered some 31 million doses by late March.
With vaccinations picking up in the second half and 2021 GDP
growth forecasts for the US recently revised up to 6% or more
and China likely to see growth in the high single-digits, we expect
emerging markets economies will see higher growth over the year,
though it may be lower than the pre-pandemic norm.
Value and Growth: Another Turn
Rising vaccination rates combined with the $1.9 trillion American
Rescue Plan passed in early March—and a potential $3 trillion
infrastructure plan on the horizon—increased the likelihood of
accelerated global growth in 2021. The economic tide has not lifted
all the world’s boats at the same time for several years, and the return
of robust growth would be a very positive development for emerging
markets companies, especially more economically sensitive value
companies, which have historically tended to outperform in the early
stages of economic recovery.
After ceding ground to growth stocks in January, value stocks took the
lead in the first quarter. In addition to higher growth expectations, plans
for infrastructure development in China, Europe, and more recently

the United States were fuel for the rally. Emerging markets materials
companies gained 9.1%, real estate 5.9%, information technology (IT)
4.7%, and energy companies 2.8%. Emerging markets banks, out of
favor during the pandemic, led the financial sector with a 5% return.
Several other industries with a value tilt also gained. Within IT,
semiconductor producers continued to shine, with a 9.2% return. The
impressive performance stemmed from rising demand for computer
chips used in everything from smartphones to cars. With very few
large-scale manufacturers, semiconductor supply has remained limited,
and trade restrictions imposed by the US last year against many
Chinese companies, including Huawei, have led to stockpiling, further
straining supply. We expect semiconductors to continue performing
well, although their biggest gains could be behind them as companies
innovate and work around the supply constraints, in our view.
Many tech and internet-related companies with lofty valuation levels
and aggressive growth assumptions significantly outperformed last
year but generally saw sharp declines from the rapid rise in bond yields
during the first quarter. Certain securities in the healthcare sector and the
e-commerce industry within the consumer discretionary sector registered
particularly steep declines of nearly 40% in the first quarter. Still, some
growth stocks were strong performers. For instance, communication
services, primarily composed of media and entertainment companies like
Tencent, was the second-best-performing sector in the MSCI EM Index
for the quarter; many of these stocks gained between 10% and 30%.
In addition to threatening valuations on some growth stocks, rising
bond yields introduce a broader risk: If rates move too far and too
quickly, they could stall the expected rebound, which would affect
all markets. Both the Federal Reserve and investors would also like to
see an orderly rate rise as growth picks up so that investors around the
world can prepare for it and avoid a major market dislocation, such as
2013’s Taper Tantrum, which was sparked by hints from the Fed that
it might begin to reduce quantitative easing.
Commodities: Rising Oil Prices
Commodities overall are entering a constructive period for demand, in our
view, especially as new infrastructure projects get under way. However, we
believe it is too early to call the start of a supercycle.
Over the first quarter, oil prices increased significantly, along with
demand and growth expectations; Brent crude oil rose above $60 per
barrel, a gain of more than $20 since November. Oil exploration and
production have dropped in recent years due to lower prices, but if
growth remains high and prices increase to the $70–$80 range, more
production would likely follow. Shale can be brought online relatively
easily, and oil companies may even consider reopening oil fields that
were unprofitable at lower prices.
For emerging markets, higher oil prices are a mixed story. Exporters such
as Russia and much of Latin America stand to benefit, while importers like
India typically face higher inflation and pressure on consumer spending
unless governments implement or increase fuel subsidies.
Brazil: Quick Change
Coming into 2021, Brazil’s economy was poised to recover strongly in the
year ahead. Pent-up demand during the COVID-19 pandemic is high,
and the country has experience in large-scale vaccination distribution.
3
In the first quarter, however, politics re-entered the picture. In a
surprise ruling in early March, a Supreme Court judge overturned two
corruption convictions of leftist and former President Luiz Inácio Lula
da Silva, possibly clearing the way for a run for re-election in 2022. At
the same time, approval ratings for populist President Jair Bolsonaro
dipped to their lowest levels since he took office in 2019. Although
Brazil’s centrist politicians have remained aligned with Bolsonaro so
far, political volatility could heat up this year, potentially weighing on
the currency and prospects for privatizations and restructurings, which
are key to the country’s long-term outlook.
Progress on vaccinations may well determine who is more popular
come election time next October. Since Brazil has a well-established
vaccination infrastructure, the main challenge in the coming months
will be supply, not distribution. To address this, the Bolsonaro
administration has started to prioritize new vaccine contracts to reduce
the burden on local production. Brazil is likely to vaccinate—at least
with the first dose—most individuals above 65 years of age by mid-
April, and almost all the population above 60 and individuals with
comorbidities by the end of May.
During the next few months, a staggered reopening will likely take
place in the country. While easing of restrictions will probably occur
across the board—influenced not only by the vaccine rollout, but also
by socioeconomic demands, political pressure, and social fatigue—some
states may have to cope with localized outbreaks, adding uncertainty to
the timeline of the country’s gradual economic recovery.
Conclusion: Pervasive Optimism
COVID-19 has remained the dominant factor in the equity markets
in 2021, though with a new focus: ending the pandemic through
vaccination. Vaccine supplies, the course of variants of the virus,
the efficacy of vaccines, and the speed of vaccination rollouts will all
determine the pace of the expected global rebound in 2021.
Over the first quarter, optimism prevailed, and for the most part,
emerging markets equities reflected that. Indeed, expectations for
strong growth have lifted earnings projections dramatically for 2021
(Exhibit 3). As long as bond yields show only limited signs of rising
too far too fast and inflation remains under control, we expect not
only the highest global growth rate in decades but also accelerated
growth that should lift emerging markets economies and brighten the
prospects for many emerging markets companies.
Exhibit 3
2021 Earnings per Share Growth Forecasts by Region
(%)
120
119.1%
90
60
47.8%
30
34.8%
27.3%
0
Latin America EMEA MSCI EM Index Asia ex-Japan
As of 16 March 2021
Source: BofA Global Research, IBES estimates, MSCI
 4

Debt
Any discussion of first quarter performance in emerging markets
debt, or any fixed income market for that matter, needs to begin
with the moves in US Treasury bond yields. Long-term US Treasury
yields have been on an upward trend since hitting all-time lows in
August 2020, but what had been a steady march higher accelerated
significantly at the start of 2021 (Exhibit 4).
In the United States, after sweeping two run-off elections in the state
of Georgia in early January, Democrats secured majority control
of the US Senate and unified control of Congress, and as a result,
expectations for more US fiscal stimulus increased significantly.
This development, along with the success of COVID-19 vaccine
rollouts and growing optimism over the global economic recovery,
spurred a sell-off in bond markets around the world. The yield on
the benchmark 10-year US Treasury note rose more than 80 basis
points (bps) to 1.74%, its highest level since January 2020. With
short-term rates anchored by the Fed’s commitment to highly
accommodative policy, the Treasury yield curve reached its steepest
level in more than five years.
These moves made for one of the worst calendar-year starts in decades
for traditional fixed income markets, and emerging markets debt was
not spared. The asset class had rallied strongly in late 2020, driven by a
confluence of positive factors, including early optimism about vaccine
In February, however, the pace of the yield rise and its composition
shifted in ways that pressured the asset class more broadly. Over
a two-week period, the nominal yield on the benchmark 10-year
US Treasury note rose a steep 40 bps and the real yield rose 46 bps
(Exhibit 5). Although real yields remained in negative territory, the
move reflected the concern that the supportive growth dynamics in the
US may now be accompanied by tighter financial conditions. At that
point, the weakness in US interest-rate-sensitive securities morphed
into a broad-based sell-off affecting the more cyclical segments of
emerging markets debt as well—and roughly coincided with the
repricing of monetary policy expectations (Exhibit 6).
Cautious Optimism
Given these dynamics, we believe a more cautious approach is
warranted in the near term, and we pared risk accordingly over the
first quarter. Coming into 2021, we had emphasized three pockets
of opportunity—high yield sovereign credit, shorter-dated corporate
bonds, and local currencies. While we have scaled back some high
yield sovereign exposure, the main area where we have reduced risk has
Exhibit 5
Nominal and Real Yields Rose Meaningfully in February
(%) (%)

rollouts, easy global financial conditions, higher commodity prices, 1.7 -0.4
and improving bottom-up fundamentals. In early 2021, however, UST 10-yr Nominal Yield [LHS]

emerging markets debt felt the opposing forces of a supportive macro 1.5 -0.6
backdrop and rising Treasury yields. The more cyclically sensitive
parts of the asset class—high yield bonds and currencies—continued 1.3 -0.8
to outperform, while the most sensitive to US interest rates—namely,
UST 10-yr Real Yield [RHS]
investment grade sovereign bonds—underperformed due to their
1.1 -1.0
longer duration profile and tight spreads, which offered little cushion
against the rise in yields. Although the rise in nominal yields was
persistent, it occurred in a relatively orderly fashion through January 0.9 -1.2
Jan Feb Mar
and was led by rising breakeven inflation expectations. Meanwhile,
As of 31 March 2021
real yields, which tend to be more important for the performance of
Source: Bloomberg
risk assets, were steady and anchored near all-time lows.

Exhibit 4 Exhibit 6
The Rise in the 10-Year Treasury Yield Accelerated in Q1 Riskier Parts of EM Bond Markets Were Impacted by the Rise
in Real Yields
Yield (%)
2.0
12/31–2/10 YTD

Hard Currency Sovereign (%) -0.78 -4.54

Investment Grade (%) -1.40 -5.30
1.5
High Yield (%) -0.07 -3.66
Hard Currency Corporate (%) 0.42 -0.80

1.0 Investment Grade (%) 0.02 -1.69

High Yield (%) 0.97 0.41
Local Currency (%) -0.34 -6.68
0.5 FX (%) -0.23 -3.61
Jan '20 Mar '20 May '20 Jul '20 Sep '20 Nov '20 Jan '21 Mar '21

As of 31 March 2021 As of 31 March 2021

Source: Bloomberg Source: JPMorgan
 5

been currency exposure. In the near term, relative growth dynamics

appear to favor the United States over emerging markets, thus Exhibit 7
The US Dollar Appears to Have Peaked
eliminating a key rationale for capital to flow to emerging markets. As
a result, the US dollar is unlikely to weaken further versus emerging DXY Index: 100 = 31 December 2019
130
markets currencies, and it did in fact strengthen over the last several
weeks of the quarter. The move was exacerbated by heavy short
positions in the US dollar at the start of the year. 110

Nevertheless, we are optimistic on the outlook for emerging markets

90
debt over the medium term for a number of reasons. The global
economy has continued to experience a V-shaped recovery, with
China and the United States serving as twin engines of powerful 70
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
growth. In China, growth has returned to pre-COVID levels and is 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
expected to approach double digits in 2021, fueled by credit growth As of 28 February 2021
Source: Bloomberg
and surging exports. In the United States, the recently passed US$1.9-
trillion stimulus bill was even larger than markets expected, and
the Biden administration is seeking an additional US$2 trillion in
infrastructure stimulus spending. The fiscal impulse and the success Exhibit 8
of vaccine rollouts led to significant upward revisions to growth Currency Valuations and Commodities Have Diverged
forecasts during the first quarter. At the start of the year, the consensus Index: JPM GBI-EM Global Diversified Index: S&P GSCI Index Spot
US growth forecast was around 4%; at the end of March, it stood at 1.5 3.5
around 6.5%. Strong demand from the two pillars of growth is likely Commodities [RHS]
to spill over to the rest of the world, including emerging markets. 1.3 2.5
From a bottom-up perspective, fundamentals are solid and should
benefit from the better growth outlook and supportive commodity 1.1 1.5
prices. Compared to the Taper Tantrum in 2013, when rising rates EMFX [LHS]
caused market dislocation, most emerging markets countries now have
0.9 0.5
the benefit of strong external positions, with balanced current accounts 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
and increasing foreign reserves. Most countries have been able to As of 28 February 2021
bridge the gap to better growth in 2021, and from here, their fiscal Source: Lazard, JPMorgan
balances and debt-to-GDP ratios should improve. For commodity
exporters, improving terms of trade should serve as an additional
tailwind. Thus, to the extent that any further rise in yields occurs for Importantly, while some pundits have drawn comparisons between
the “right” reason—stronger global growth—the net effect of tighter the current environment and the Taper Tantrum in 2013, we do not
financial conditions and stronger growth in developed markets should subscribe to this line of thinking. Emerging markets fundamentals
still be positive for emerging markets. are much less vulnerable: They simply do not have the same external
imbalances and overheating characteristics as they did in 2013
Currencies: Which Way for the Dollar? (Exhibit 9). Moreover, technicals are very different due to a lack of
We believe the US dollar’s peak roughly one year ago marked the significant inflows into local currency bond markets, and valuations in
beginning of a secular decline in the greenback for several reasons currencies are much cheaper today.
(Exhibit 7). First, after the initial spike higher from US fiscal stimulus
wanes, longer-term growth should revert to potential growth levels in
both the United States and emerging markets. For the United States, Exhibit 9
EM Current Account Balances Are in Much Better Shape than
potential growth is just under 2% while for emerging markets countries,
in 2013
it is estimated to be 4%–4.5%. The growth advantage of emerging
markets countries, if viewed as structural, should attract foreign capital, Current Account as % of GDP
0
boosting their currencies versus the dollar. Second, while emerging
markets governments are likely to run fiscal deficits of roughly 6% this
year, most have current accounts that are nearly balanced. Contrast that -1

with the United States, where we expect combined fiscal and current
account deficits of around 13% this year. Third, emerging markets -2
currency performance is positively correlated to commodity prices over
longer periods (Exhibit 8). With the anticipated rebound in global -3
growth, we are expecting more upward pressure on prices over the next '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21F '22F
couple of years, especially in commodities, where it is difficult to adjust As of 28 February 2021
supply. Finally, the US dollar remains expensive on a real effective Source: Lazard, Haver Analytics, JPMorgan
exchange-rate basis against most emerging markets currencies.
 Outlook on Emerging Markets

Conclusion: Positive but Patient

We maintain a positive secular outlook on emerging markets debt.
We believe the prudent move at this juncture is to adopt a more
conservative stance and patiently await opportunities to add risk at
better valuation levels. This strategy served our portfolios well in 2020,
when we started the year conservatively positioned and aggressively
added risk as valuations reached multi-year lows following the sell-off
due to the COVID-19 pandemic. We continue to see opportunities in
emerging markets corporates and shorter-dated high yield sovereigns,
and we expect currencies to offer better beta opportunities in the
second half of the year.

This content represents the views of the author(s), and its conclusions may vary from those held elsewhere within Lazard Asset Management.
Lazard is committed to giving our investment professionals the autonomy to develop their own investment views, which are informed by a
robust exchange of ideas throughout the firm.

Notes
1 Source: UBS Evidence Lab. Forecast is based on extrapolating the 7-day moving average of the vaccination rate, as of 25 March 2021.

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Published on 7 April 2021.
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