One of the most commonly held misconceptions about emerging markets is that they are among the first to crumble during periods of economic difficulty, but Templeton Emerging Markets Investment Trust’s Andrew Ness says past crises have made the companies he invests in more resilient.
Ness, co-manager of the £2bn Templeton Emerging Markets Investment Trust (TEMIT), said he has been addressing misunderstandings about emerging markets for years.
These misunderstandings are being tested now more than ever as the world faces the prospect of global recession.
“I think that there’s going to be a potential range of experiences from this crisis for the emerging economies for the short to medium term,” said Ness.
But it may be that economies are more resilient than they were than in previous crises, having taken the time since the global financial crisis to repair their banking systems.
“Economies are typically in much better positions relative to any point in past crises,” said Ness (pictured), as the banking systems are now typically much better regulated, supervised and capitalised.
“We’ve already seen a flavour of that in the global financial crisis where none of the major emerging banking systems collapsed.
“What that means for asset classes is that there is a resilience and an ability to withstand short-term periods of economic pain without that necessarily compromising banking system balance sheets and then contaminating the real economies,” Ness said.
“It’s really a question of what the economic consequences and duration of the Covid-19 outbreak are and whether they’re so significant that they start to compromise banking systems. 
“And that’s as much of an issue for emerging economies as it is for developed economies and it’s one of the great unknown factors that they’re dealing with.”
Looking for those businesses that have emerged stronger from past economic crises, the TEMIT manager highlighted two banks: India’s ICICI Bank and Banco Bradesco in Brazil.
Although Ness admitted that Indian and Brazilian banks have been particularly weak since the Covid-19 outbreak, he still sees value in holding them for the long-term as he believes they will flourish in any post-pandemic recovery.
Looking first at the ICICI Bank – a private sector bank in India – Ness said that the stock has fallen almost 50 per cent from its peak in late February.
ICICI Bank share price over the past six months
Source: Google Finance
“It’s one of the leading banks in the system and one that absolutely still will be around when the coronavirus is a historical event,” explained the manager.
Alongside a strong capital base and profitability margins Ness said the Indian bank has “one of the best in class funding franchises in India: a very strong deposit base” that gives it an advantage over its peers.
Under prime minister Narendra Modi – who came into office in 2004 – the Indian government has introduced multiple reforms and significant corporate tax cuts to help it become the world’s manufacturing hub and attract more businesses and investment. And this should benefit ICICI Bank.
“So, given that strong capital exists, the profitability of the business and the coverage of their assets we think that the bank can absorb quite substantial growth in NPLs [non-performing loans] over the next six to 12 months without having to raise additional equity,” said Ness.
“That tells us that it’s a pretty resilient business that will be rallying and competitive as we emerge from the coronavirus.”
It’s very much the same story for Brazil’s Banco Bradesco, which Ness said is one of the best banks in the world and also one of the best-managed.
In addition to its similarities with ICICI Bank– high profitability and strong, robust balance sheets – Ness said Brazil had gone through a recession as recently as 2014, something which will actually help it get through this next one.
The 2014 financial crisis in Brazil occurred alongside a political crisis, which saw former president Dilma Rousseff impeached. The economic crisis was largely attributed to the government’s mishandling of policies aimed at stimulating the Brazilian economy – such as increasing national minimum wage, expanding credit and others – that were mishandled and combined with a fall in external demand for Brazilian exports led to a recession.
However, having gone through this fairly recently, Brazil’s banks have been de-risking balance sheets over the past three-to-four years already, said Ness, “and – as a consequence – went into this crisis from a fairly defensive position”.
This isn’t to say that – in both countries and emerging markets broadly – businesses won’t suffer in the short term, Ness said, and he has downgraded earnings expectations for both banks. But with an outlook going beyond the coronavirus horizon, the TEMIT manager believes that they will likely come back stronger after the pandemic.
The four FE fundinfo Crown-rated investment trust was launched in 1989 and co-managed by both Ness and Chetan Sehgal since 2018.
Over the past five years TEMIT has been the second-best performer in the 14-strong IT Global Emerging Market sector, making a total return of 32.22 per cent. In comparison its peer group made a loss of 2.58 per cent and the MSCI Emerging Markets benchmark made a return of 17.51 per cent.
Performance of trust vs sector & index over 5yrs
Source: FE Analytics
TEMIT is currently trading at a 12.1 per cent discount to net asset value (NAV) – as at 6 May – is 1 per cent geared, has a dividend yield of 2.3 per cent and an ongoing charges of 1.03 per cent.