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NSR H1 2021 Excerpts - EM Portfolio flows - A light at the end of the tunnel

Nigeria Strategy Report – H1 2021 Excerpts

Global Economy and Markets

• In this afternoon’s cut-out of our core strategy document – The Nigeria Strategy Report, we look at the major themes that dominated portfolio flows to EM over H2 2020 as well as our outlook for flows to EM over 2021.
• Over H1 2020, emerging markets equities performance declined by 10.7%. This reflects strong selloffs in Q1 2020 (-23.9%) – a fallout of the coronavirus pandemic and oil price shock which rippled through global financial markets, outweighing the rally seen in Q2 2020 (+17.3%). Specifically, the adoption of an accommodative stance by the US Fed as well as other monetary bodies to combat the adverse impact of the pandemic sparked positive sentiments across EMs equities over Q2 2020. For context, US Fed trimmed rates by a cumulative of 150bps in March 2020 to 0.25% and pledged to keep interest rates low while simultaneously offering trillions of dollars in credit to spur growth. However, EMs equities saw a rebound (+26%) over H2 2020. While EM equities maintained a positive return over Q3 2020 (+8.7%), positive COVID-19 vaccine news and the conclusion of the US presidential election which curtailed uncertainties, led to a rally in Q4 2020 (+15.8%). On the fixed income leg, emerging markets government bond spreads tightened more than 15bps and 61bps in Q3 20 and Q4 20 respectively over comparable U.S securities. This largely reflects investors’ appetite for riskier assets with attractive valuations, in the wake of accommodative monetary policy across most developed markets.
• Going forward, we think the confluence of rollouts of the COVID-19 vaccine across various countries, prospects for commodity prices, election of Joe Biden as US president, direction of monetary policy across developed market as well as growth expectations for emerging markets will chart the course for portfolio flows to the emerging markets in 2021. On the COVID-19 vaccine, since the vaccine trial success by Pfizer Inc and its German partner – BioNTech SE, the rollout of the vaccine across countries including US, UK, Japan, amongst others, serves as a significant positive catalyst for global recovery and an upside to capital flows to EMs. Meanwhile, the conclusion of the US-presidential elections in November 2020 with Joe Biden emerging the winner is expected to curb US-China trade tensions. This, in addition to IMF’s forecast for EMs growth to rebound by 6% in 2021 - a faster growth relative to developed economies (+3.9% in 2021) - makes valuations for EMs relatively attractive. Against these backdrops, we see scope for higher portfolio flows into EMs in 2021.