JAN 2021

Outlook on Emerging Markets

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Equity What was good for the global equity markets in the fourth quarter was even better for emerging markets. The MSCI Emerging Markets Index outperformed the MSCI World Index, representing developed markets, in the last three months of 2020, with a return of 19.7% compared with 14.0%. Notwithstanding this year’s COVID-19 pandemic and lockdowns around the world, emerging markets equities also outperformed for the year: 18.3% versus 15.9%.

The MSCI EM Index posted an impressive recovery of more than 70% following the precipitous drop in global stock markets in the first quarter, on par with both US equities and the broader developed markets. China, the largest country in the MSCI EM Index at more than 40%, was the third-best-performing market this year (behind South Korea and Taiwan). Though China’s recovery since the bottom has not been as large as the broader index, its equity market fell significantly less in the first quarter as the government was able to effectively manage the spread of the virus (Exhibit 1).

The major events that propelled the strong fourth quarter may well continue to drive emerging markets in 2021. In November, two COVID-19 vaccines showed remarkable efficacy rates of around 95% in late-stage trials, signaling that an economic rebound on the heels of vaccine distribution may soon begin. US elections also brought welcome news for the markets: Democrat and former Vice President Joseph Biden won the presidential election over Republican President Donald Trump, holding out the promise of more stability. Prior to the crucial Georgia run-off elections in early January, Republicans looked likely to maintain a majority in the US Senate. However, at the time of this writing, Democrats appeared poised to take control of the chamber and therefore Congress.

In another encouraging, if less heralded, development for emerging markets, value stocks rallied strongly in November and extended their gains into December in anticipation of a global economic recovery in 2021. After 10 years of underperformance versus growth stocks and many false starts for value over that time, we are not quick to call a

Summary• The recovery in emerging markets equities that began in

late March picked up steam in the fourth quarter thanks to COVID-19 vaccine breakthroughs and the US election outcome. The MSCI Emerging Markets Index outperformed global developed markets equities in 2020.

• We expect that emerging markets economies will benefit further as the vaccine is distributed in developed markets during the first half of 2021 and in emerging markets later in 2021 and 2022; value companies, in particular, are poised to benefit from higher global growth.

• Despite a bumpy ride in 2020, emerging markets debt demonstrated its resilience: All segments of the asset class finished the year in positive territory, with corporate bonds leading.

• An expected recovery in global economic growth, solid fundamentals, and attractive valuations in the most cyclical parts of the asset class paint a bright picture for emerging markets debt in the year ahead.

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“great rotation” into value. However, we believe that the fundamentals point to a potentially significant recovery in value stocks in 2021, and emerging markets, with many large industrial and cyclical companies, would stand to benefit.

The Linchpin: Vaccine Distribution Investors showed just how important the COVID-19 vaccine is to the prospects for emerging markets companies: In November, after the encouraging news on Pfizer and Moderna vaccine trials were made public, the MSCI EM Index rose 9.3%. A gain of 7.4% followed in December.

Successful distribution of the vaccine is now the overriding factor for a return to growth in emerging markets—and much of the world—in 2021. Developed countries with the capital to pre-order the vaccines, notably the United States, the United Kingdom, and parts of Europe, have lined up millions of doses already, and are likely to vaccinate large portions of their populations during the first half of 2021 (Exhibit 2). In fact, the largest vaccination campaign in history has already begun with more than 5.1 million doses administered in 22 countries as of 30 December 2020.

A few emerging markets may be able to vaccinate about half of their populations by the second and third quarters, but many others are likely to make the most significant progress in late 2021 and early 2022. Some emerging markets governments have arranged deals with Pfizer, whose vaccine has been approved in several countries already, while others have signed up with companies whose vaccines are still in late-stage trials currently, such as AstraZeneca (Exhibit 3). However, after Britain became the first country to grant emergency authorization to the vaccine developed by AstraZeneca and University of Oxford, Argentina and India followed suit. The AstraZeneca vaccine could potentially clear the way for a cheaper and easier-to-store alternative for much of the developing world. Some vaccines, however, may ultimately not have successful trials, and the number of vaccines eventually received could be lower than expected.

Exhibit 2COVID-19 Vaccine Advance Market Commitments (Millions of Doses)

0

1,000

2,000

3,000

LATAMex. Brazil

BrazilJapanCanadaIndonesiaUKCOVAXIndiaEUUSA

(Millions)

Potential Dose Purchases

Confirmed Dose Purchases

As of 20 November 2020

Source: Duke Global Health Innovation Center, Capital Economics

Exhibit 3Emerging Markets Confirmed Vaccine Pre-Orders (Per Capita)

0.0

0.5

1.0

1.5

2.0

2.5

BangladeshKuwaitPeruLebanonVenezuela EcuadorEgyptCosta RicaIndonesiaBrazilArgentinaIndiaMexicoEUChile

Confirmed Vaccine Pre-Orders per Capita

COVAXX (United Biomedical)

CanSino Biologics

G42 Healthcare

Sinovac

CureVac

Gamaleya Research Institute

J&J

Moderna

Pfizer/BioNTech

Sanofi-GSK

Novovax

Oxford/AstraZeneca

As of 20 November 2020

Source: Duke Global Health Innovation Center, Capital Economics

Exhibit 12020 Equity Market Performance

Emerging Markets Outperform Global Developed Markets

50

75

100

125

150

DecNovOctSepAugJulJunMayAprMarFebJan

Index 100 = 31 December 2019

MSCI WorldMSCI US

MSCI EMMSCI EM ex-China

MSCI China

MSCI China

MSCI EM ex-China MSCI EM MSCI US

MSCI World

COVID-19 Decline (31 Dec - 23 Mar) (18.0%) (39.0%) (31.8%) (30.6%) (31.8%)

Recovery Since Bottom (23 Mar - 31 Dec) 58.0% 84.6% 73.5% 74.0% 70.0%

YTD Total Return (30 Dec) 29.5% 12.6% 18.3% 20.7% 15.9%

As of 31 December 2020

The performance quoted represents past performance. Past performance is not a reli-able indicator of future results. This information is provided for illustrative purposes only and does not represent the performance of any product or strategy managed by Lazard. The indices are unmanaged and have no fees. One cannot invest directly in an index.

Source: MSCI

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China and Russia have developed their own vaccines, and they have vaccinated more than a million people. Russia announced that its Sputnik V vaccine has an efficacy rate of 91%; Argentina, Belarus, Hungary, and Serbia have also begun vaccinating their populations with the Sputnik V vaccine. China’s Sinovac has been conducting Phase 3 trials in Brazil, Indonesia, and Turkey, with early data from Brazil showing an efficacy rate of between 50% and 90%. Sinopharm announced that its vaccine candidate had an efficacy rate of 79% based on an interim analysis of Phase 3 trials but provided no supporting data, including the size of the trial population or information about any serious side effects.

Emerging markets countries that have not yet struck vaccine deals may have to rely on COVAX, a global initiative led by the World Health Organization (WHO) and the GAVI Alliance. COVAX has committed to distributing a group of vaccines equitably among developed and developing countries. Its goal is to supply 2 billion doses (vaccinating 1 billion people) by the end of 2021 to participating countries, which include all emerging markets except Russia. Although the COVAX portfolio is large in absolute terms, it will not go far when split among the 172 participating countries.

Other constraints could delay vaccine distribution in emerging markets, including transport infrastructure and a limited number of professionals to administer the vaccine. The challenge will be greater if the vaccines need to be stored at very low temperatures, as Pfizer’s does. Costs of cold storage and transport typically account for four-fifths of the total cost of vaccination programs1 and would reduce the affordability and likelihood of widespread vaccination in the poorest countries.

From a logistics perspective, DHL estimates that the feasibility of in-country vaccine distribution is generally high in East Asia, Eastern Europe, the UAE, Chile, and South Africa. Distribution challenges are significant across much of the rest of sub-Saharan Africa, and parts of South Asia and Latin America, as well as in regions with both warm climates and limited cold-chain logistics infrastructure. Each country’s experience in administering vaccine programs may also affect its success; South Africa and parts of the Middle East and Asia, for example, have successfully handled vaccinations for AIDS, MERS, and SARS relatively recently.

Overall, the economies of China, South Korea, and Taiwan are likely to be less affected by the course of vaccine distribution because they have generally dealt well with COVID-19 outbreaks and have already reopened to a much greater extent than most. However, for countries particularly hard hit by the virus, including Brazil, India, Mexico, and South Africa, obtaining multiple vaccine options cost effectively and administering them successfully, including choosing who will get vaccinated first, will not only be key to reopening their economies, but also help spark a global economic recovery in 2021.

Importantly, though, even if vaccine distribution takes longer than expected in emerging markets, we believe the outlook is still positive. The reopening of developed economies during the first half as people there are vaccinated is likely to trigger a global economic rebound that could benefit emerging markets. In addition, the low GDP growth base of 2020—the International Monetary Fund (IMF) has estimated emerging markets growth for 2020 at negative 5.8%—means that growth in 2021 will almost certainly be higher. Finally, countries with

virus outbreaks currently are handling them with fewer shutdowns than in early 2020, even those with record-high case counts, which points to higher economic activity going forward (Exhibit 4).

New US Administration: Political Risk EbbsNovember was a pivot point not only due to the vaccine breakthroughs but also because of political change in Washington. Although we expect the new Biden administration to remain tough on trade with China, and possibly turn up the pressure on human rights, as well as reintroduce sanctions on Russia, it is likely to work in a more collaborative fashion with allies and engage more with opponents. The result for the markets is likely to be lower political risk premiums overall, in our view.

Biden’s victory over Trump also introduces the possibility that populism could diminish elsewhere in the years ahead—or at least become less noisy. Brazil’s President Jair Bolsonaro toned down his populist rhetoric noticeably in the wake of US elections and Brazil’s municipal elections in November when many candidates he supported lost.

For the markets, the US election results go hand in hand with the US dollar, and after bouts of strength during the pandemic, the dollar resumed its weaker trend in November—boosting emerging markets currencies (Exhibit 5). Since the equity markets hit bottom in late March, the dollar has weakened overall by 11%. In addition to the expectation that the Federal Reserve will keep US interest rates low for some time, sizable fiscal stimulus is likely under the new administration, potentially leading to a wider fiscal deficit and ultimately a stable or weaker US dollar in 2021. When combined with a US budget deficit, it also suggests that dollar weakness could persist beyond then. In any case, stronger currencies on the back of stronger economic growth could make emerging markets assets more attractive as investors seek yield.

The incoming US administration has high hopes for passing an infrastructure spending program. In addition to potential benefits for US growth and employment, this could increase demand for concrete and cement, energy, heavy machinery, materials, and industrial products from companies in emerging markets—typically value companies. We expect earnings for these companies to increase in 2021 as a result, further supporting emerging markets.

Exhibit 4Mobility: Most Markets Are Trending toward Reopening

-10 -5 0 5 10 15 20 25 30

-8

-12

-4

0

4

8

12UAE POR

HUNIRE

GREARG

POL

PHIPERSPA

SWI

MEXMAL

FRAPAKIND

ITACZE

UK

AUS

NORBEL

COLINDO

THASAUEGY JAP/SIN

SWECANISR/QATGER

DEN

TURQ

NET

ZAF KEN

CHI

NZE

SKOOOO

BRA/RUS/TAI/USAAUS/FIN

Change in Work Mobility as Percent of Pre-COVID Baseline

Change in Retail Mobility as Percent of Pre-COVID Baseline

As of 11 December 2020

Source: Google. 1 week change in 7-day average.

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Value and GrowthThe fourth quarter rally in value stocks in part reflected this potential boost in demand from the United States. We think value is poised to continue the recovery in 2021 as the economic backdrop changes.

Higher global growth should be the biggest driver: Value companies tend to be economically sensitive and to see higher earnings at the beginning of an economic recovery. An effective vaccine rollout over the course of 2021–2022 could also result in weaker demand for COVID-19 related winners, which include some of the fastest-growing companies now trading at very high valuations. During this transition to a post-COVID economy, we expect the current frenzy for aggressive growth, or Growth At Any Price (GAAP), may give way to a more selective approach based on fundamentals with valuation discipline.

For emerging markets, exporters in parts of Asia and Central and Eastern Europe may lose the tailwind they enjoyed in 2020, but higher commodity demand from reopened economies would lift export values for natural resources, notably oil and metals, and a recovery in tourism would be a welcome boost to countries like Thailand, the Philippines, and Turkey.

Within the value sector, hard-hit financials are particularly well positioned for a rally, in our view. Already, financials in Europe and Latin America registered the strongest November returns, with banks up 39% in Poland, 37% in Turkey, and 34% in Peru. Financials have lagged the broader equities market since it bottomed on 23 March, in part due to concern over loan quality during the pandemic. However, in addition to unprecedented policy support for banks, non-performing loans have been lower than expected so far, and banks, which made aggressive loan-loss provisions in the first half of 2020, are likely past the peak of provisions, which should support an earnings and profits recovery. Given banks’ resilience in 2020, we also think it is likely that dividend payments to investors, suspended during the pandemic, will resume in 2021. Emerging markets banks are trading with a dividend yield of 3.6% compared

to 2.1% for the MSCI EM Index. In the current low interest rate environment with the search for yield, we believe emerging markets banks should be even more attractive heading into 2021.

China: One Step Forward, Two Steps BackAs the “first in, first out” in the COVID-19 pandemic, China enjoyed a much faster recovery in 2020, leading to a return of 29% in US dollar terms. Though still somewhat fragile for much of the second half, the recovery gained strength in November and December.

However, more signs of interference by the Chinese government cloud the investment picture, in our view. In a dramatic intervention in November, the Shanghai Stock Exchange halted the much-anticipated $37 billion initial public offering (IPO) for online payments giant Ant Group in the eleventh hour. It would have been the largest public equity offering in the world, but the government released new regulations for Internet lenders that could negatively impact Ant’s business, its valuation, and its future IPO. Though the new rules likely reflected regulators’ desire to control risk within the financial system, the action caused confusion. To us, it served as a reminder that the government is still involved in the fate of not only state-owned enterprises (SOEs) but also private sector companies. Recently, Chinese regulators opened an investigation into whether Alibaba, China’s largest e-commerce company, had engaged in monopolistic practices by restricting vendors on its platform from selling merchandise on the platforms of competitors.

Ongoing tensions between China and the United States also create a less than certain environment for Chinese equities. In November, Trump issued an executive order banning American investors from transacting in the securities of 31 Chinese companies—since raised to 35—that the Department of Defense has identified as “communist Chinese military companies.” The list includes some large, well-known companies, such as the Chinese National Offshore Oil Corporation (CNOOC), and several are currently in equity indices. Various index providers have announced their decisions to remove Chinese securities from their indices that are explicitly listed in the executive order (i.e., not affiliates or subsidiaries), and in early January, the New York Stock Exchange, before reversing course, said it would delist three state-owned Chinese telecom companies by 11 January when the requirement takes effect. Details of the order have not been finalized, though investors have until 11 November to divest. So far, it appears that the Biden administration has no plan to overturn the order. Importantly, the president will need to reaffirm the executive order annually or let it expire.

Over the fourth quarter, the list of Chinese companies opting to withdraw from US exchanges also grew. Rather than meet the Trump administration’s new requirement that they provide audit paperwork to US regulators, many companies have announced plans to list on exchanges in China or go private. Also looming large for investors is the US list of Chinese companies that are prohibited from purchasing supplies from US companies, though sanctions on the telecoms giant Huawei were relaxed somewhat in November.

Exhibit 5US Dollar vs. MSCI EM Index: 5-Year Performance

90

95

100

105

110

115

2020201920182017201680

100

120

140

160

180

20202019201820172016

Nominal Trade Weighted US Dollar Index [RHS]MSCI Index - Price [LHS]

MSCI EM Index - Price Nominal Trade Weighted US Dollar Index

As of 31 December 2020

The performance quoted represents past performance. Past performance is not a reli-able indicator of future results. This information is provided for illustrative purposes only and does not represent the performance of any product or strategy managed by Lazard. The indices are unmanaged and have no fees. One cannot invest directly in an index.

Source: FactSet, MSCI

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Poised to Resume the Growth TrajectoryThe recovery in emerging markets equities that began in late March picked up steam in the fourth quarter thanks to the COVID-19 vaccine breakthroughs and the US election outcome. Looking ahead, we expect that emerging markets economies will benefit as the vaccine is distributed in developed markets during the first half of 2021 and in emerging markets in later 2021 into 2022. The major central banks, with the exception of China’s, have shown no inclination to raise rates, and inflation is expected to remain low in emerging markets overall, smoothing the way for higher growth. We believe these factors, along with a weaker US dollar, bode well for value companies, in particular.

We recognize certain risks to our positive outlook. Even under a new US administration, trade tensions with China are likely to remain high, and anything that could prevent a meaningful rebound in economic activity would hold back the equity markets, including lack of fiscal stimulus where and when it is needed or a serious setback in vaccine distribution.

In some developed markets, the effects of job losses and fiscal deficits due to the pandemic may be felt for years to come. For emerging markets economies, however, we do not expect the pandemic to greatly alter the long-term trajectory for growth. Indeed, in its latest forecast, the IMF projected 6% growth for emerging markets and 3% for developed markets in 2021, with the growth gap only widening after that. Thanks to their strong fundamentals, we believe emerging markets are positioned well not only to recover in 2021 but also to realize their higher growth potential in the years ahead.

Debt Things to Look Forward ToEmerging markets debt investors endured a bumpy ride in 2020, but in the end the asset class once again demonstrated its resilience. The blended asset class suffered the worst quarterly drawdown in its nearly two-decade history in the first quarter, only to be followed by its second-best quarterly return. Despite episodes of volatility akin to those during the global financial crisis, all segments of the asset class finished the year in positive territory. Emerging markets corporate bonds led the way with a return of 7.13%, owing to the strong balance sheet positions of corporates and significant outperformance during the depths of the crisis. Hard currency sovereigns returned 5.26%, benefiting from a longer duration profile amid a drop of 100 basis points (bps) in US Treasury yields. Meanwhile, local currency debt registered a gain of 2.69%, thanks to a strong fourth quarter rally in emerging markets currencies.

After an eventful and challenging year that included the unforeseeable, we believe emerging markets debt investors have much to look forward to in 2021. A favorable macroeconomic backdrop, solid bottom-up fundamentals, and pockets of attractive valuation are all favorably aligned, supporting the case for a continued rally as we enter 2021.

The top-down drivers of emerging markets debt performance are looking very strong. A V-shaped recovery already began to unfold in the second half of 2020, and the sharp rebound in demand is expected to continue. Global growth should reach its highest levels in several

years with emerging markets leading the way (Exhibit 6). Although the rollout of COVID-19 vaccinations will be a gradual and uneven process, the arrival of multiple effective vaccines should lead to a definitive normalization in economic activity. Importantly, all major regions are participating in the rebound, and emerging markets, which contracted less than developed markets in the first place, are now recovering at a faster pace, according to leading economic indicators (Exhibit 7). Manufacturing PMIs are at multi-year highs in a number of key countries including China, India, and Brazil, further bolstering the case of a broadening and accelerating global economic recovery that should lead to emerging markets outperformance.

Significant monetary and fiscal stimulus measures from the world’s largest economies have boosted the rebound in global growth. Global central banks have flooded their respective systems with liquidity. The absolute numbers are enormous, and none of the banks has shown any signs of pulling in the reins. In 2020, the central banks of the G10 economies injected around $4 trillion of liquidity into financial markets through bond purchase programs, and they are expected to inject nearly $3 trillion more in 2020. Given the vast amounts of fiscal stimulus already provided, fiscal efforts may play a smaller role in 2021. However, policy makers stand ready to act, as reflected by the $900 billion package recently enacted in the

Exhibit 6Global Growth Expected to Rebound, with EM Leading

-10

-5

0

5

2021F2020F2019201820172016

GDP Growth (YoY; % Change)

JapanEU

USEM

As of 31 December 2020

Source: Lazard, Haver Analytics, JPMorgan

Exhibit 7PMIs Leading in Emerging Markets

20

30

40

50

60

20202019201820172016

Composite PMI (%)

Developed Markets

Emerging Markets

As of 31 December 2020

Source: Bloomberg, IHS Markit

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United States. Given the significant slack in the economy, we do not see stimulus efforts leading to significant inflationary pressures at this juncture, although we are keeping a watchful eye on pricing pressures which could build as the recovery matures. Thus, financial conditions are likely to remain easy to facilitate the ongoing recovery, supporting the case for a weaker US dollar and significant capital inflows to emerging markets.

Additional macro factors bolstering the case for emerging markets include a bullish outlook for commodity prices and reduced uncertainty and tensions in global trade. Supply is tight across commodity markets, including oil, and a rebound in demand as global growth recovers should support strong commodity prices. Geopolitical risks have decreased, as the Biden administration is likely to pivot away from protectionist policies, which bodes well for global trade and should further support growth.

From a bottom-up standpoint, emerging markets fundamentals have stabilized on the back of improved growth expectations. Debt-to-GDP ratios rose and fiscal balances deteriorated in 2020, but access to capital has helped bridge the gap to a growth rebound in 2021. Stronger countries and corporates seized on the opportunity to issue debt at low rates to significantly reduce financing needs for the year ahead. Meanwhile, weaker credits have been supported by emergency lending programs from the IMF. Additionally, G20 countries have worked with the IMF and World Bank on debt service sustainability initiatives to suspend interest payments from the poorest countries. In 2020, most of the countries with the weakest balance sheets either restructured their bonds (e.g., Ecuador and Argentina) or defaulted on them (e.g., Lebanon and Zambia), and thus, with few exceptions, we do not see material risk of sovereign credit events in 2021. Nevertheless, fiscal positions are somewhat stretched in some countries, leaving less room for fiscal response going forward. However, with the Fed on hold indefinitely and inflation running near all-time lows in a number of countries, emerging markets central bankers have the luxury of maintaining accommodative monetary policies for the time being.

From a valuation standpoint, we see pockets of deep value in the most cyclical parts of the asset class. Specifically, we see value in high yield sovereign credit and local currency debt. High yield sovereign spreads are more than 600 bps over US Treasuries, which is wide relative to history (Exhibit 8). Typically, one year after sell-offs of greater than 5%, high yield spreads average around 465 bps, indicating ample room for further spread compression. High yield spreads are also about 450 bps wide of investment grade sovereigns, still above levels seen during the global financial crisis (Exhibit 9). Given our outlook, we see scope for around 50–100 bps of tightening in high yield spreads from current levels. In contrast, we see little value in investment grade, where spreads of around 150 bps are back to where they began 2020 and essentially in line with recent averages. Thus, investment grade offers neither much room for spread tightening nor a substantial cushion against a potential rise in US Treasury yields.

We also expect local currency debt to rally in the coming quarters, with high yielders outperforming low yielders, given the former’s greater sensitivity to growth and attractive valuations. Over the past several years, local currency debt has effectively been in a secular

bear market with episodes of outperformance. An inflection point has proven illusory, but we believe the backdrop for sustainable outperformance may finally be in place, and we have shifted our risk usage accordingly. The missing ingredient for a sustainable rally has been growth; This may be changing as the cyclical backdrop improves, a trend that currencies stand to benefit from more than any other part of the emerging markets debt asset class due to their greater cyclicality. Aside from an improved growth outlook, factors favoring emerging markets currencies include clean investor positioning, supportive flows, diminished headwinds from dollar strength, strong commodity prices, and valuations that remain dislocated despite the recent outperformance (Exhibit 10). While monetary easing cycles in emerging markets have largely come to an end, with some central banks expected to begin raising rates later in 2021, we expect developed markets central banks to maintain their accommodative monetary stances over the next few years. An increase in interest rate differentials would lend further support to emerging markets currencies.

Exhibit 8High Yield Spreads Remain Elevated

0

300

600

900

1,200

20202018201620142012201020082006

Spread (bps)

HY AverageIG AverageHigh Yield

Investment Grade

As of 31 December 2020

Source: Bloomberg, JPMorgan

Exhibit 9The High Yield vs. Investment Grade Spread Differential Is Historically Wide

0

200

400

600

800

20202018201620142012201020082006

Spread Differential (bps)

HY - IG AverageHY - IG

As of 31 December 2020

Source: Bloomberg, JPMorgan

Outlook on Emerging Markets

Technicals also remain supportive as the search for yield continues to attract investor flows to emerging markets debt. Over the past six months, investors have increased their emerging markets debt exposure by $50 billion, and we expect the pace of inflows to accelerate as the global search for yield intensifies due to yields near record lows across most of the developed world.

Nevertheless, we are cognizant that risks remain, and we approach 2021 with a degree of caution. Although we do not see inflation as a major threat at this juncture, interest rate risk is skewed toward rising Treasury yields. Despite the rally in risk assets, Treasury yields

continue to price in a degree of flight-to-safety premium as nominal and real yields are near record lows in medium and long tenors of the yield curve. Additionally, US Treasury yield volatility is near an all-time low, which in and of itself does not indicate that yields are destined to rise, but may indicate that investors have grown complacent, thus increasing the risk that yields could rise rapidly should consensus views change. While inflation is likely to tick higher from depressed levels, we do not see a drastic or rapid increase in inflation as a major risk at this point. However, we do expect the flight-to-safety premium currently embedded in yields to dissipate, leading to an increase in yields. Thus, we have shortened duration to defend against a potential rise in Treasury yields.

A key risk to our base case of a strong global growth rebound is that COVID-19 vaccines do not prove to be as successful as anticipated. We are encouraged by recent progress and believe that the ongoing rollout of vaccines will go a long way in normalizing the global economy, but there is uncertainty around widespread distribution and vaccination rates. Another important risk factor to our expectation of emerging markets outperformance is a premature tightening of global financial conditions similar to what occurred in 2018. We see such a scenario as unlikely at this juncture; however, if it were to come to pass, it would damage the prospects of recovery in emerging markets.

Overall, we believe that after enduring a challenging period, emerging markets debt investors have several things to look forward to in 2021. Top-down factors, bottom-up fundamentals, and valuations are all favorably aligned, supporting the case for strong returns into 2021. We are deploying close to our full risk budget across strategies to capitalize on this environment while remaining cognizant of the risks that lie ahead.

This content represents the views of the author(s), and its conclusions may vary from those held elsewhere within Lazard Asset Management. Lazard is committed to giving our investment professionals the autonomy to develop their own investment views, which are informed by a robust exchange of ideas throughout the firm.

Notes1 Source: Capital Economics

Important InformationOriginally published on 7 January 2021. Revised and republished on 8 January 2021.This document reflects the views of Lazard Asset Management LLC or its affiliates (“Lazard”) based upon information believed to be reliable as of the publication date. There is no guarantee that any forecast or opinion will be realized. This document is provided by Lazard Asset Management LLC or its affiliates (“Lazard”) for informational purposes only. Nothing herein constitutes investment advice or a recommendation relating to any security, commodity, derivative, investment management service, or investment product. Investments in securities, derivatives, and commodities involve risk, will fluctuate in price, and may result in losses. Certain assets held in Lazard’s investment portfolios, in particular alternative investment portfolios, can involve high degrees of risk and volatility when compared to other assets. Similarly, certain assets held in Lazard’s investment portfolios may trade in less liquid or efficient markets, which can affect investment performance. Past perfor-mance does not guarantee future results. The views expressed herein are subject to change, and may differ from the views of other Lazard investment professionals. This document is intended only for persons residing in jurisdictions where its distribution or availability is consistent with local laws and Lazard’s local regulatory authorizations. Please visit www.lazardassetmanagement.com/globaldisclosure for the specific Lazard entities that have issued this document and the scope of their authorized activities.

Exhibit 10Emerging Markets Currency Valuations Are Near All-Time Lows

0.5

1.5

2.5

3.5

202020182016201420122010200820062004200220000.9

1.1

1.3

1.5EMFX Valuations EMFX Valuations

Commodities [RHS]

GBI REER [LHS]

As of 31 December 2020

Commodities reflect S&P GSCI Index.

REER is the real effective exchange rate.

Source: Lazard, Bloomberg, JPMorgan, S&P