We expect a staggered global recovery, as different regions were affected by COVID-19 at different times. China was the first to enter the crisis and the first to emerge from it, while the U.S. recovered later (peaking in quarterly GDP growth in Q2 2021), followed by Europe (peaking in quarterly GDP growth in Q3 2021) and, finally, emerging markets excluding China—all in tandem with the easing of COVID-19 mobility restrictions.

An exceptionally strong United States has been the driving force behind global equities for much of the year, and we are now seeing Europe catching up. Global market strategists at JPMorgan believe that, while Europe’s path has been difficult, the region is on track to become a complementary engine to the U.S., driving a broad-based global growth surge by mid-year. As mobility remains stable and vaccine rollouts accelerate in Europe, the outlook is once again for growth forecasts for the current quarter to rise as more economic activity resumes.

In previous editions, we have highlighted our preference for European stocks within developed markets, given their more cyclical and value-oriented sector composition. Are emerging markets next in line? As vaccination rates rise and economies reopen, emerging markets are expected to regain their GDP growth premium relative to U.S. GDP by Q4 2021 and thus resume outperforming the U.S. stock market.

Nevertheless, we continue to overweight emerging market equities in our global asset allocation, based on the following factors:

• Rising commodity prices provide a tailwind for commodity exporters in emerging markets by improving terms of trade, driving stronger growth, and, consequently, leading to an improvement in fiscal and current account balances.
• Capital flows into emerging markets have remained strong, and emerging-market currencies have appreciated this quarter. To a large extent, this outcome is linked to optimism that efforts to contain the virus in emerging markets and vaccination rollouts will follow Western Europe’s lead and lead to a strong rebound in the second half of 2021.
• This outlook is reflected in the fact that GDP growth in emerging markets, excluding China, is expected to rise from -3.1% this quarter to 6.5% in 2H21, according to estimates by J.P. Morgan.
• Emerging market valuations are cheap and are trading at a wider-than-usual discount relative to developed markets. (30%)
• FX should provide a tailwind due to the expected weakness of the USD.
• Emerging market stocks should benefit regionally from investors' shift toward cyclical and value assets.