Which emerging markets have been ahead of the coronavirus curve? - June 2020
This article was originally published in Investment Week on 28 May 2020
Emerging markets have underperformed global and developed market indices over the past ten years, in spite of having greater opportunities for earnings growth.
Their populations are younger, wealth levels are rising, consumption levels are lower than those of developed markets, and there is a high level of aspiration to live a better life than the previous generations.
The Covid-19 crisis will affect countries differently, and some emerging markets have been ahead of the curve in dealing with the crisis. The younger age profile and lower prevalence of 'lifestyle diseases' in some of these markets may also result in significantly lower mortality rates.
East Asian emerging countries, such as China, Korea and Taiwan, have used their history of dealing with pandemics, coupled with severe lockdowns (in China), to navigate the early months of the crisis relatively well when compared to developed markets.
Other countries, such as India and South Africa, also implemented early and stringent lockdowns, which should help reduce the impact on their economies, especially when their relatively young populations are taken into account.
These countries collectively account for 75% of the MSCI Emerging Market index. The big losers are likely to be Brazil, Russia and Mexico, whose responses were 'too little too late' and could potentially spiral out control. Obesity (Mexico) and high-median age (Russia) may make matters worse.
Be diligent when picking stocks and do not be tempted into stressed companies because they appear optically cheap. The binary nature of the investment case is not a correct use of client capital. On the other hand, companies that benefit in this environment are likely to see their positions strongly enhanced. Where they trade at reasonable valuations, be prepared to own them in size.
- Opportunities will be best in asset-light businesses with low levels of debt
- We highlight e-commerce companies such as Alibaba and JD.com in China, and others in Latin America
- The most disrupted industries will be those that depend on the movement of people
- Where new habits have been formed (video conferencing), a permanent change in behaviour is likely - this is very negative for hotel stocks and airlines, among others