Our outlook for developed- and emerging-market equities in 2021
Developed markets. Earnings are set to be the key driver of equity returns in developed markets in 2021. After this year’s recession, economic recovery should boost sales growth and improving margins should translate into a rebound in earnings. Our top-down estimate is for 20% earnings growth for the S&P 500 and 25% for the Stoxx Europe 600.
Equity valuations should nudge down as earnings bounce back, but will remain high on an absolute basis, supported by the low-yield environment. US price-earnings compression is expected to be a mild 10%.
Cash returns to shareholders (dividends and buybacks) are not expected to be the main driver of returns in 2021 although they should improve after this year’s setbacks. Dividends look safe in the US while buybacks are set to improve from a low level. In Europe, a lower base means the rise in earnings should be higher than in the US, with financials key for an improvement in dividends and buybacks.
Market performance should become less concentrated as economic conditions normalise. Structural growers remain attractive over the long run, but their relative appeal will decline in an environment marked by recovery. This recovery should provide some more room for a rotation towards value and cyclicals, whose outperformance could, however, be capped by a continuation of low bond yields.
Our 2021 year-end targets for the S&P 500 and Stoxx Europe 600 stand at 4050 and 445, respectively—a double-digit percentage increase on current levels.
Emerging markets. A macroeconomic outlook for emerging markets in 2021 that is radically different from a year ago should provide material support to EM equities next year. A synchronised global recovery, continued Chinese economic leadership, prolonged ultra-low rates and a weakening US dollar are all significant tailwinds for this asset class.
Current expectations are for growth in earnings for MSCI EM Index stocks to surpass 20%. Latin America should benefit from the largest base effect, while North Asia is expected to continue delivering steady growth. There should also be a solid rebound in earnings in other EM regions.
Valuations should logically contract as earnings steadily improve, but we expect them to remain at the higher end of their historical range. The lack of alternatives for investors means that, as elsewhere, equities in emerging markets could continue to benefit from the TINA (“There Is No Alternative”) effect in 2021.
Our year-end target for the MSCI EM is 1350 (broken down between a price-earnings ratio of around 13.5x-14x and 12m-forward EPS expectations of around USD95-100), equivalent to a total return of about 11%.