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Investors must pick their emerging markets


Portfolio managers are urging investors who are considering emerging markets to examine countries individually and understand their health systems and governance risks as to whether they will show resilience.

Emerging markets have not been spared from the volatility caused by the COVID-19 outbreak.

Alessia Berardi, head of emerging markets macro and strategy research at Amundi Asset Management, notes that emerging markets are falling into recession, the depth and the length of which will mainly depend on the infection curve, the length of lockdowns and how soon global treatments for the virus become available.

  • Among the emerging markets, in terms of the infection curve, Turkey, Brazil and Russia are the most affected countries so far, with India and Peru following some way behind.

    Emerging markets have had the benefit of the early warnings and can learn from the best practices implemented in countries that experienced the pandemic earlier.

    “On the flip side, the bad news is that the healthcare systems in most emerging markets are ill-equipped to handle the kind of severe outbreak seen in the hardest-hit countries in the West,” Berardi says.

    Matthew Culley, a research analyst in the emerging-markets equity team at Janus Henderson, agrees: “We believe that neither Indonesia nor India – with their large migrant workforces and ill-equipped public health systems – are well prepared to handle a surge in COVID-19 cases.”

    According to Western Asset Management, the near-term outlook for emerging markets in Asia is weak for Malaysia, Thailand, the Philippines and Indonesia, not only due to weakened medical infrastructure but also the impact of a sustained epidemic on tourism, consumption and industrial output due to supply chain disruptions.

    In terms of governance, Berardi notes that emerging-market authorities have adopted a much bolder easing mode, particularly in countries such as South Africa, India and Mexico.

    “At this point in time, the stimulus is still primarily being driven by monetary policy rather than fiscal authorities,” Berardi says.

    The growth of particular emerging markets means that some are likely better equipped to confront the pandemic, while others may face headwinds.

    Culley says: “Brazil had been emerging from recession when confronted by this crisis. With demand for its commodities exports – chief among them, oil – slashed, efforts to maintain economic growth have been overwhelmed.”

    In order to asses the risks emerging markets are experiencing, Amundi measured their fiscal fragility and their external vulnerability, and discovered that in a stress ranking South Africa, Colombia, Hungary and Malaysia are the countries that are more exposed on both sides.

    Countries that low rank on this scale are Russia, Peru, the Philippines and Thailand.

    The slowing global trade will hurt export-driven countries, but according to Culley, the next stage of emerging market growth is likely to be defined by value-added industries and developing digital infrastructure.

    “We also expect the crisis to be a catalyst for the wider adoption of digital platforms. Several cohorts that had yet to fully engage in e-commerce and social media had no choice but to do so during the pandemic,” Culley says.

    Another factor benefiting emerging markets is that developed countries are looking to diversify supply chains off the back of the trade war.

    Daniel Graña, emerging markets equity portfolio manager at Janus Henderson, says: “Corporations were already revisiting their reliance upon individual suppliers and countries due to last year’s trade war, and we expect these initiatives to accelerate.”

    Graña thinks Vietnam’s outlook is positive, as it is going up against China as a manufacturing powerhouse.

    “As China moves up the value-added curve, a lot of the sort of lower value-added industries such as shoes and garments have to look for a home for production.

    “Samsung, for example, no longer manufactures phones in China, they manufacture exclusively in Vietnam. So even higher-tech companies are moving to Vietnam.”

    Amundi’s emerging market growth forecasts appear slightly less negative for 2020, but weak economic performance is expected to continue for longer, resulting in a U-shape rather than a V-shape recovery with less robust growth levels until 2021.

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