Markets Update: Emerging Markets’ Next Phase

Episode Summary

Executive Summary: The discussion centered on emerging markets’ weak start to 2021 after a constructive January outlook. Jen Roth argued EM underperformed due to a broad global fixed-income repricing, higher U.S. rates, a stronger dollar, and idiosyncratic shocks in places like Turkey and Brazil, while new COVID variants added pressure. She sees a better second-half setup if U.S. rates remain fairly priced and EM can offer either carry or real growth.

Main Topics: Q1 2021 EM Underperformance (Priority: 5/5): EM assets fell sharply in the first quarter, with both external and local indices posting losses amid a global rates selloff and stronger dollar. U.S. Exceptionalism and Fed/Rates Repricing (Priority: 5/5): Investors debated whether strong U.S. growth will continue to dominate or is already priced in, affecting appetite for non-U.S. assets like EM. Dollar, Commodities, and EM Linkage (Priority: 4/5): A firmer U.S. dollar changed the usual EM/commodity feedback loop, with commodity strength now driven more by developed-market demand than EM demand. COVID Variants and Regional Volatility (Priority: 4/5): Variant-driven infection surges in South Africa, Brazil, and India created market volatility and threatened economic reopening in affected EM countries. Idiosyncratic Country Risks (Priority: 3/5): Country-specific issues, especially in Turkey and Brazil, compounded broader EM weakness and kept investors cautious. Second-Half 2021 Outlook for EM (Priority: 5/5): Roth said EM could improve if U.S. rates stabilize and EM offers meaningful carry or genuine growth, drawing both dedicated and crossover investors.

Key Arguments: EM’s poor Q1 performance was not purely EM-specific; it reflected a global fixed-income repricing that also hit U.S. credit. Higher U.S. fiscal-growth and inflation expectations pushed rates higher, strengthened the dollar, and compressed risk premia across EM. There are two competing market views: either U.S. exceptionalism continues and caps EM upside, or U.S. optimism is already priced in and non-U.S. assets become more attractive. The usual weaker-dollar/stronger-commodity/stronger-EM pattern may reassert itself, but only when EM growth also shows clear improvement. New COVID variants are a key short-term drag on several EM markets, even if lockdowns are politically less favored. For the rest of 2021, EM needs a clear value proposition—either attractive carry or convincing local growth—to regain broader investor interest.

Data Points: EM external index Q1 return: -4.74% - First-quarter performance cited by Jen Roth EM local index Q1 return: -6.67% - First-quarter performance cited by Jen Roth S&P 500 Q1 return: +5.77% - Used as comparison showing EM lagged U.S. equities Podcast recording date: Thursday, April 22, 2021 - Recorded before release on April 23, 2021 Reference to U.S. growth outlook: Next month or so - Period during which strong U.S. data were expected to support exceptionalism U.S. rates market view: More fairly priced - Basis for reduced risk of a taper-tantrum-like move

Pivotal Quotes: "Unfortunately, you know, that conversation was far from correct." — Jen Roth: Reflecting on the more constructive January outlook for EM versus the weak Q1 outcome "The weakness seen in EM was not about EM per se." — Jen Roth: Explaining that EM’s poor performance was largely driven by broader global rates and risk repricing "The challenge is going to be providing a true value proposition for the asset class." — Jen Roth: Her framework for what EM needs in order to improve in the second half of 2021

Implications: Listeners should expect EM sentiment to remain sensitive to U.S. rates, dollar moves, and variant-related growth risks. A clearer second-half opportunity may emerge only if EM growth and carry become more compelling.