Cast your mind back to early November when Hamish Douglass, among others, predicted that a US election win for Democrat Joe Biden offset by a Republican-controlled Senate would be a "nirvana" outcome for the sharemarket. The market was already running.

Fast forward to this week, a week in which we saw the storming of the Capitol by pro-Donald Trump supporters, calls for Trump’s impeachment, and confirmation that the US congress will be wholly under the control of the Democrats. How did the market respond? It ran again, buoyed by low rates and the prospect of more pandemic stimulus: it’s up almost 10 per cent since Douglass’s nirvana call back on 5 November.

With that in mind, it’s perhaps worth considering another voice that made itself heard this week, that of legendary British investor Jeremy Grantham. In a commentary piece entitled Waiting For The Last Dance, the co-founder of GMO began the new year with an ominous warning about what he sees as a “fully fledged epic bubble”.

“This bubble will burst in due time,” Grantham said this week. “No matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. Make no mistake—for the majority of investors today, this could very well be the most important event of your investing lives.”

Grantham did, however, conclude his essay with a paragraph on what action investors should consider. And it includes steering away from growth stocks and investigating emerging markets and value stocks.

“Those at the very cheap end include traditional value stocks all over the world, relative to growth stocks. Value stocks have had their worst-ever relative decade ending December 2019, followed by the worst-ever year in 2020, with spreads between Growth and Value performance averaging between 20 and 30 percentage points for the single year!

“Similarly, emerging market equities are at one of their three, more or less co-equal, relative lows against the US of the last 50 years. Not surprisingly, we believe it is in the overlap of these two ideas, Value and Emerging, that your relative bets should go, along with the greatest avoidance of US Growth stocks that your career and business risk will allow. Good luck!”

On that note, two emerging market ETFs that carry a Morningstar medal rating are: iShares MSCI Emerging Markets ETF (ASX: IEM), and the Vanguard FTSE Emerging Market Shrs ETF (ASX: VGE)

To give you an idea of what you’re getting, VGE, for instance, which has a relatively cheap management fee, tracks the FTSE Emerging Markets All Cap China A Inclusion Index, a free-float-adjusted, market-cap-weighted index constructed to replicate the stock market performance of 24 emerging economies. “The Australian vehicle gets its exposure by investing in the much larger and longer-running (US listed) Vanguard FTSE Emerging Markets ETF VWO,” says Morningstar analyst Kongkon Gogoi. “The index is highly diversified, containing more than 4000 securities.”

a table showing emerging markets ETFs VGE and IEM

Source: Morningstar Direct

VGE, IEM - growth of $10k

a chart showing $10k growth of VGE and IEM

Source: Morningstar Direct

In Firstlinks this week, Graham Hand ponders some of the new year’s more optimistic news, including an APRA chart which reveals loans subject to repayment deferral by banks have fallen to only 2.3 per cent of all loans or $60 billion, from over $250 billion worth 10 per cent of loans only six months ago.

Firstlinks also features another special ebook in which leading fund managers and product providers offer their top stock, fund and sector picks for 2021.

Elsewhere, Emma Rapaport teases out the best performing funds of 2020; and discovers which investments you had your eye on in 2020.

Following this week’s events in Washington, Morningstar head of policy research Aron Szapiro explores the ramifications of an America under a Biden administration. Corporate business taxes are set to rise, but not up to 2016 levels, Szapiro writes.

Morningstar is upbeat on a recovery for the US economy. But a lot is riding on the coronavirus vaccine, says Preston Caldwell.

Morningstar’s Dave Sekera examines which sectors are poised for a comeback when consumer behaviour normalises; and his colleague Allen Good looks at the prospects for oil and gas giants in the year ahead.

China had a strong year after a rocky start, but can it continue—and what does a US President Biden mean for the region? Morningstar analyst Lorraine Tan explains.

In local equities, we talk to Morningstar analyst Angus Hewitt about InvoCare and discover why the wide-moat funeral home operator is tipped to cement its market-leading position.

At the other end of the valuation spectrum is REA Group. Low interest rates, not earnings potential, underpin the potential of the owner of Australia's No 1 property portal, says a Morningstar report. 

And finally in Your Money Weekly, Peter Warnes echoes Grantham, arguing that prudent investors must question the sustainability of the recovery given the elevated valuations of risk assets.

“Uncertainty and volatility are two certain companions for 2021,” says Warnes. “The almost care-free rise in global share markets since the late March 2020 nadir is unlikely to be sustained through 2021.”

  

Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.

See also Morningstar Guide to International Investing.