Small cap companies managed to extend their rally this month, hitting all-time highs. That bodes well for emerging market assets, given the small-cap gauge has moved closely with the MSCI Emerging Market Index.
Granted, surging virus counts in the U.S. and elsewhere and more lockdowns could leave investors jittery. However, Treasury yields also moved lower in reflection of Fed Chair Powell’s hint that the Fed will stick to its guns on stimulus and keep a lid on bond yields.
Combined with the retreat in the US dollar, that’s a setup that can help shore up sentiment for emerging markets.
Chart 8: Emerging markets and small caps
Finding a vaccine is one thing. The ability to distribute it efficiently and fund it easily is another.
Asia has already shown it has the capacity to curb the spread of the virus. Debt-to-GDP levels for 2021 in Asian countries such as China and Indonesia are projected to be lower than their peers in the developing world, based on projections by Moody’s Investors Service. India is an exception in the region.
Meanwhile, Brazil and Colombia in Latin America will still be in a challenging situation as they are already hampered by relatively higher debt-to GDP ratios.
Chart 9: Emerging market region – Asia shines (Index 31/12/19=100)
The New Silk Road that would link seaborne and rail freight routes from China to Europe is facing severe congestion as China replaces the U.S. as the EU’s top trading partner. From January to July, EU imports from China increased 5% while imports from the U.S. dropped 12%, according to data from Eurostat.
As a result, Chinese companies are literally detouring around the high cost of using ships and aircraft. Instead they’re turning to trains and European freight and logistics operators to move their products to the EU.
Chart 10: EU freight operators profit from Silk Road (Index 01/03/20 = 100)