Emerging markets are investment favourites again, but watch the risks

EMERGING markets (EMs) appear to be enjoying a resurgence among investors, after years of being relegated to the sidelines.

In 2020, despite being ravaged by Covid-19 and a dire economic prognosis, EM equities closed the year with a strong outperformance against global equities. The MSCI EM Index returned over 18 per cent in 2020, compared to the MSCI All Country World Index return of 16.25 per cent. The rebound from the March trough was as much as 70 per cent. While the annualised 10-year return was disappointing at 3.63 per cent against the MSCI ACWI's 9.13 per cent, the record between end-2000 and end-2020 was strong at 9.58 per cent versus MSCI ACWI's 6.12 per cent.

Fund inflows have also picked up. Data from the Institute of International Finance (IIF) showed an inflow of US$46 billion in December, making the fourth quarter the strongest quarter for EM inflows since just prior to the "taper tantrum" in 2013. Overall in 2020, its tracker showed inflows of US$313 billion, just US$48 billion short of 2019, mainly driven by inflows into China debt. IIF believes the outflow of capital from EMs "is now firmly in the rearview mirror". It believes robust inflows are set to continue.