2020 was a year of North Asian exceptionalism (Exhibit 1), powered by best-in-class Covid management that allowed swift re-opening of the industrial sector. China was the focal point of the Asian export recovery, but Chinese exceptionalism was not limited to strength in the real economy. The potent mix of growth and interest rate edge over the US, coupled with one-time benefits of index inclusion, led to China capturing a disproportionate share of EM capital flows. A long overdue catch-up of China’s share in global financial flows to its outsized footprint in global trade is underway.

2021 should see more of the same, underscored by continued strength in CNY FX; FX is expected to contribute significantly more to GBI EM total returns than bonds This year’s strong current account flows may ebb a little at the margin next year, but should be largely offset by a stronger capital account amid lower geopolitical volatility and a vaccine-led revival of capital flows into EM. USD/CNY is expected to end the year around 6.25, anchor appreciation of the broad Asian FX complex to varying degrees; we are OW CNY and IDR in GBI EM, and short USD/SGD and USD/THB outright. INR is the only regional currency that can buck the CNY trend to some extent as RBI intervention remains robust, inflation permitting. Overall, we project 6.5% total returns from GBI EM Asia, with FX contributing the lion’s share of returns (Exhibit 2).

from current to capital accounts as marginal FX driver. A distinctive feature of the 2H20 economic recovery was that the ace virus fighters of North Asia did not fare any better than the more troubled economies of South Asia (ex-India) from a foreign portfolio flow perspective. That should change next year as the impact of the Covid recession begins to fade. There have already been signs of this in November; presumably the passage of the US election and vaccine optimism are combining to unlock pent-up demand for decent quality EM assets in a world of zero / negative DM rates. Laggard S. Asian FXshould catch-up, but incompletely to N.Asia given the broad-based nature of the anticipated capital flow rebound.