China and north Asia are better positioned after the Covid-19 pandemic than the majority of emerging Europe and Latin America countries, according to several emerging markets fund managers.
Asia appears to be the winner of the crisis, and the only place in the world with a visible recovery, said Xavier Hovasse, manager of the €238m Carmignac Portfolio Emergents fund.
He singled out China as a clear winner, due to the country’s eradication of the coronavirus, which has allowed for increased consumer spending and growth in private sector investment.
He said: “North-east Asian economies offer strong growth opportunities while south-east Asia is muddling through with a lot of divergence.
“The picture is less rosy in Latin America that continues to struggle with the pandemic and the potential second order economic implications of the pandemic.”
Hovasse said emerging Europe and Latin American countries are still struggling with Covid-19 second waves, local lockdowns, as well as fiscal issues.
Russia – with its improving macro fundamentals, fiscal position, falling debt levels, and robust current account – was the one exception, he said.
Hovasse said Russia is well-positioned to benefit from a cyclical recovery and rising commodity prices.
Another exception, Brazil, is also well-positioned to benefit from a cyclical rebound and increase in commodity prices after it experienced a 50 per cent sell off earlier in the year.
Rob Brewis, manager of the $194m Aubrey Global Emerging Markets Opportunities fund, also highlighted China as a standout.
“In 2019, China accounted for about one third of global GDP growth, in 2020 it will far exceed 100 per cent of global GDP growth, as the only major global economy to grow,” he said.
“China’s control of the virus was both faster and more successful than any other major country which has allowed a return to near normal much faster.”
Elsewhere in emerging markets, the impact has been more severe, but he observed that most are rebounding very rapidly, with India being the most dramatic.
Performance of China versus rest of emerging markets
Source: FE Analytics
Brewis described emerging markets as “a broad church”, with economies at various stages of wealth and development, resulting in different experiences through 2020’s pandemic.
Despite this, he said the kind of businesses which have seen a boost in China have “almost universally” thrived across the rest of emerging markets.
He highlighted Sea Ltd, a Singapore based e-commerce and online gaming business, as an example.
“These were already in the sweet spot of growth in the countries in which they operate, but virus lockdowns merely ignited the afterburners,” said Brewis.
“Even then there have been plenty of challenges, and many have not executed as well, but for Sea it was an opportunity to cement their leading market position, which they took with both hands.”
It was north Asia, in particular China, Korea and Taiwan, that were the main winners from a health standpoint, according to Al Bryant, head of emerging markets at River and Mercantile.
He said their success was due to their experience with severe acute respiratory syndrome (Sars) in the early 2000s and Middle East respiratory syndrome (Mers) in 2015.
Bryant said most of the winners also benefited from their entrenched positions in the tech hardware sector which has fed the work from home themes of 2020.
However, he said more stimulus from developed markets and a successful vaccine delivery worldwide could become a headwind on these same ‘winning traits’.
He said stimulus will drive global growth and trade, which in turn will drive value, small caps and cyclicals, and that a expects successful vaccine delivery and deployment will help hardest-hit markets like Brazil, Indonesia, India, Mexico, Russia and the Philippines.
Performance of Emerging Markets in Q1-Q3 2020 vs Q4 2020
Source: River and Mercantile, Bloomberg
James Johnstone, manager of the $10m RWC Next Generation Emerging Markets Equity fund, said there were always bound to be winners and losers from the pandemic, due to its diversified nature of geography, demographics, resources, and economies.
Indeed, there are 30 countries classified as emerging markets and around 20 classified as frontier markets by index provider MSCI.
Overall, Johnstone said that most governments and authorities in emerging and frontier markets are dealing with Covid-19 effectively and are recovering more quickly than developed markets
Economic improvement can be seen predominantly in north Asian markets such as South Korea and Taiwan, but also in some south-east Asian economies, such as Vietnam.
He said Korea and Taiwan will continue to benefit from the growing theme of technology disruption, leisure, and gaming, all enabled by new 5G infrastructure.
Latin America was hit harder than other emerging and frontier markets, with the exception of Brazil, which Johnstone said has had the benefit of accommodative monetary policy and fiscal stimulus.
He also expects Joe Biden's upcoming presidency to be supportive for emerging and frontier markets.
“Continued fiscal expansion should further pressure the dollar while a more measured and multilateral approach to foreign policy will likely result in improved business confidence across the world paving the way for a global recovery led by manufacturing,” he explained.
“Nonetheless, while there is some differentiation, central banks and governments in developed markets continue to provide economic stimulus at unprecedented rates.
“History shows that the expansion of developed market central bank balance sheets has resulted in large capital inflows into emerging markets.”
With a full roll-out of a Covid-19 vaccine potentially on the way, he was also bullish on certain discretionary-related industries such as travel, which would be a significant boost to many emerging economies who have a large exposure to tourism.