Patrik Schowitz

As equities improve, emerging markets and Europe are looking like good bets

Amid a dramatic US-led stock market rebound, overlooked emerging market equities stand to reap the benefits of a cyclical upturn, subject to US dollar strength, while European equities are increasingly attractive after recent policy boosts

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International Monetary Fund China staff member Lin Jianhai and European Central Bank president Christine Lagarde attend the IMF Finance Committee Plenary on October 19 last year. Photo: Reuters

Patrik Schowitz

Published: 9:00pm, 29 May 2020Updated: 10:32pm, 29 May 2020

After the fastest-ever bear market triggered by the pandemic fallout at the beginning of the year, global equity markets have staged a dramatic rebound, leaving the MSCI All-Country World Index (ACWI) only about 10 per cent down. So far, the rebound has been led by the United States.

One big question as economic recovery picks up is whether emerging market equities are now a good bet. Or are European equities (excluding the UK) worth considering given that, together with emerging markets, they are the worst-performing major region so far this year? Equities in both regions have fallen by around 17-18 per cent this year.

The reasons for Europe’s poor performance are not difficult to see: the European economy has been hit harder than most by the coronavirus – and pre-Covid-19 economic growth was already challenging. Last year, weak global trade and rising political risks kept the euro zone’s gross domestic product growth barely positive.

In comparison, emerging market equities have performed more defensively, falling by less and recovering by less, but ending up in a similar place. That is because emerging markets in Asia, which contracted and controlled the Covid-19 epidemic earlier than the rest of the world, account for around 80 per cent of the global emerging market equity space.

So, which region might fare better in a cyclical upturn? Comparing the sector make-up, emerging market equities seem better positioned: they have significantly higher exposure to cyclical sectors such as capital goods, technology and financials, while Europe has higher exposure to defensive stocks, which provide consistent dividends and stable earnings, such as health care and consumer staples.