We expect a staggered global recovery, as different regions were affected by COVID-19 in different time periods. China was first in, first out, and the US subsequently recovered (peak quarterly GDP growth was highest in 2Q21), followed by Europe (peak quarterly GDP growth 3Q21) and finally emerging markets ex-China, all in tandem with the easing of COVID-19 mobility restrictions.

An exceptionally strong U.S. has been the driving force for global equities for much of the year and now we see Europe catching up. JP Morgan's global markets strategists believe that while Europe's road has been rough, the region is on track to become a complementary engine to the U.S. driving a broad-based global growth boom by mid-year. As mobility remains stable and vaccine launches accelerate in Europe, the bias is once again for current quarter growth forecasts to increase as more activity picks up again.

In previous issues, we have highlighted our preference for European stocks within developed markets, given their more cyclical and value sector composition. EM is next in line? As vaccinations increase and reopening occurs, emerging markets are expected to reestablish the GDP growth premium versus US GDP for 4Q21 and thus resume outperforming equities.

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

• Rising commodity prices serve as a tailwind for emerging market commodity exporters through higher terms of trade, stronger growth and thus improved fiscal and current account balances.
• Capital flows to emerging markets have remained healthy and emerging market currencies have appreciated this quarter. To a large extent, this performance is related to optimism that EM containment and vaccine launches will follow Western Europe's lead and achieve a strong rebound in the second half of 2021.
• This view is embedded in the fact that GDP growth in emerging markets, excluding China, will rise from -3.1% this quarter to 6.5% in 2H21, according to J.P. Morgan estimates.
• Emerging market valuations are cheap and trade at a wider than historical discount to DM (30%).
• FX should provide a tailwind due to expected USD weakness.
• Emerging market equities should be a regional beneficiary of investor rotation into cyclical and value assets.