The COVID-19 pandemic hit many Emerging Market countries hard, but China has bounced back relatively quickly. Others, such as Brazil, are still fighting to keep cases down. As a result, the economic impact – and stock market performance – across the emerging markets has become very polarised.
As Janus Henderson portfolio manager Jennifer James very accurately sums it up with “EM countries are in the same storm but not in the same boat”.
India has lagged Asia-Pacific this year: it’s just gone into recession for the first time in its history, has been hard hit by coronavirus and asset manager JP Morgan has downgraded its growth forecast from 7% to 6.5%, but believe that the country’s prospects look good from a long-term view.
After an extensive period of very rapid growth, India has slowed in the past few years. Its structural reform process has also lost momentum, leaving the economy less open and flexible today than we expected.
Yet even with our downgrade, India’s growth forecast leads all emerging economies by a wide margin, reflecting its ample room for convergence, its young and growing population, and the rapidly improving education and skill level of its human capital.
The Chinese economy rebounded quickly from the coronavirus shutdown. Funds with a China focus have been at the top of the leader board for much of the year, while star companies like Tencent and Alibaba have surged.
Covid-19 has undoubtedly heightened tensions between the US and China, but the possibility of a new President in the White House has given global investors hope of a change in tone from Washington.
Professor Keyu Jin of the London School of Economics believes that Biden will turn the heat down. But there will always be tension between the China and the U.S. due to the size and importance of their economies on the world stage. In the long run it’s going to be a trial of strength.
Ady Rothman, investment strategist at Matthews Asia, thinks a Biden administration would bring a different approach to US-China relations, but not necessarily a softer one. “Despite the current tensions, the Chinese economy hasn’t really suffered very much,” says Rothman, who notes that the services sector is now the biggest part of China’s economy, with domestic demand taking up the slack from lower global trade.
Paras Anand, chief investment officer, Asia Pacific, at Fidelity, believes that coronavirus crisis has accelerated the trend towards the “Asianisation of Asia”, with China as the hub of a growing regional network which takes in countries like Vietnam, Taiwan and South Korea. The decision by the owners of Ant Group to float in Shanghai and Hong Kong rather than New York is one example of the growing confidence in Chinese entrepreneurs to float locally, Anand adds. The float, which is due later this year, is set to become the largest IPO in the world to date.
China's inclusion in the FTSE Russell World Government Bond index is another key marker for the country's progress, says Matthews Asia portfolio manager Teresa Kong, particularly as it's being added as a "developed" market (in equity indices it's still listed as an emerging market).
What are the risks to the recovery in China? In the short term, despite the Chinese economy re-opening, Dale Nicholls, manager of Fidelity China Special Situations says “it pays to be wary”, particularly of cyclical companies. He fears a global downturn could derail China’s rebound from the events of this year. But there seems to be little sign of a slowdown in evidence so far.
With its close geographic and political links to China, they have been the best performers of our emerging market cohort.
Taiwan Semiconductor is the biggest holding in the investment trust Templeton Emerging Markets Investment Trust (as of October 31, 2020), just ahead of Chinese tech behemoth Tencent. Co-manager Chetan Sehgal likes Taiwanese companies in general because they have a recent track record of increasing dividends. He’s also a fan South Korean companies because they’re improving their corporate governance.
Russia’s prospects divide opinion among asset managers, especially as the country’s economy, as a large oil exporter, has been flattened by this year’s slump in oil prices. The Morningstar Russia index is the second worst performing emerging market this year with a loss of more than 20%.
Daniel Grana, an emerging markets portfolio manager at Janus Henderson, says the corporate sector in Russia is strong and well capitalised, particularly the banks. From a risk point of view, Russia is very attractive. But the country has been slow to react to the transition to low carbon in a year when oil demand from airlines and cars has fallen off a cliff. The authorities have done very little to prepare for peak oil.
JP Morgan flags Russia as one of the countries most exposed by the transition to a low carbon world and estimates that the shift away from oil could reduce Russian’s economic growth by a substantial 6.5% over the next 30-40 years.
Brazil is also one of the countries most exposed to changing ESG trends, according to JP Morgan. This year it’s been the worst performing of the Morningstar EM country indices, with a drop of nearly 30% in USD terms (just -3% in local currency, which shows how much the Brazilian real has fallen) and with one of the highest Covid-19 death rates in the world. But economic growth is expected to return in 2021, helped by a rebound in commodity prices. A Biden Presidency is likely to improve political co-operation, says Gary Greenberg, head of global EM at Federated Hermes, and that is likely to help Mexico too.
Overall recovery
Greenberg says North Asian countries, having shown resilience in dealing with the coronavirus, should continue to prosper, but the recovery should be broader-based next year across emerging markets. He expects natural resources-focused countries like Mexico and Russia to do well as the world economy starts to re-open and demand for energy increases. EM stocks are cheaper than developed ones too in terms of long-term trends, he says.
Pictet’s EM portfolio manager Avo Ora says that a weaker USD could also help EM performance in 2021 after a bruising year for EM currencies in 2020. After such a disruptive year for the world economy, an 11% gain for the EM index is a pretty credible performance, but China remains key to beating this figure in 2021.
