Mercurial Politics Took Center Stage in Emerging Markets in 2021. Expect That to Continue.

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Running a country like China means never having to say you’re sorry, particularly to foreign investors in Chinese stocks. Capitalists learned that the hard way in 2021.

Beijing came roaring into the year with its economy beating the pandemic and its eyeballs-rich tech companies the envy of the world. With 2021 growth in the bag, it turned to “reform.” Oops.

China’s tinkering arguably makes long-term sense: reining in digital monopolies, deleveraging a runaway property sector, bringing U.S.-listed companies home. (How would Washington react if

Amazon.com

were traded only in Shanghai?)

But lack of clarity, to put it mildly, about ground rules and end games hammered the tech stars that had driven emerging markets’ sensational run in late 2020:

Alibaba Group Holding

(ticker: BABA),

Tencent Holdings

(700.Hong Kong),

Meituan

(3690.Hong Kong), and the rest. Their travails dragged the

iShares MSCI Emerging Markets
exchange-traded fund (EEM) to a 7% loss in 2021, while the S&P 500 index charged ahead by a quarter.

Things weren’t so bad everywhere. Taiwan and South Korea, whose combined emerging markets index weight almost equals China, cushioned the blows from Beijing.

Taiwan Semiconductor Manufacturing

(TSM) advanced 10% this year, modest for the leading producer of the world’s hottest commodity. But that came after tripling in late 2020.

South Korea’s engineering-driven conglomerates, or chaebol, continued to raise their profile in emerging technologies from electric-vehicle batteries to hydrogen fuel. Seoul is set to start 2022 with a bang as battery maker LG Energy Solution aims for an $11 billion initial public offering in New York. National social-media champion

Kakao

(035720.Korea) bucked bearish tech trends to gain 45% this year and successfully spin off its banking and payments components.

India, the No. 4 emerging market, was another bright-ish spot. The

iShares MSCI India
ETF (INDA) gained 10% despite a sharp late-year correction. Investors shrugged off a nasty Covid spike in the spring to focus on the vast nation’s “demographic dividend” (median age 28) and long runway for moving poor rural dwellers into an urban middle class (per capita income a third of China’s). Prime Minister Narendra Modi’s pro-market reforms—digitized state payments, integrated national sales tax, better bankruptcy laws—may be gaining traction after seven years in power.

Emerging markets commodities stocks offered some wild rides in 2021. Brazilian iron-ore giant

Vale

(VALE) climbed 30% through Aug. 1, then dropped by a third. Russia’s

Gazprom

(GAZP.Russia) rode record European gas prices to a 60% year-to-date gain.

These names have become a footnote to the asset class, though. Materials and energy stocks make up 14% of emerging markets indexes, and information technology 22%, despite this year’s losses. Emerging markets have become integral to global innovation and the prime virgin territory for digitization. That’s a good and exciting thing in the long run, though it adds volatility where there was plenty to begin with.

The bad news from 2021 was that mercurial politics will continue to upend the best-laid emerging market plans and analyses. Joe Biden’s presidency hasn’t eased U.S.-China tensions. Instead, President Xi Jinping went on a regulatory tear of his own. Global vendors like Taiwan Semi and

Samsung Electronics

(005930.Korea) are increasingly caught between the two, and/or forced to make expensive investments in both.

Astute investors will catch the next Alibaba or Tencent somewhere in years to come. It won’t be easy.