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Where next for Emerging Markets…

June 17, 2020

The first part of this century was good for emerging market investors.  Many (at least those of us old enough to remember) will undoubtedly recall how the BRIC (Brazil, Russia, India, China) economies were once the darlings of investors.  Post the Asian financial crisis of 1997/8 and coinciding with the time that Goldman Sachs originally coined the acronym ‘BRICs’, the equity market performance for each country was nothing short of remarkable as their importance to the global economy grew.  Performances though has been punctuated by the global financial crisis (GFC) of 2008 and, since then, on both a relative and absolute basis, have generally struggled to challenge some of the performances being delivered by the more developed equity markets.

Much has happened since the GFC, culminating in what seems an increasingly frosty attitude towards one half of the BRICs – notably China and Russia.  Additionally, we also appear to be on the cusp of a breakdown of globalisation.  The consequence of both could lead to a disparity between performances of developed and certain emerging markets that could resemble those witnessed over the last decade. It is my belief that the developed economies will lead the recovery and performances over the short to medium term.

Does that mean avoid emerging markets?  No. In that case, what’s next for emerging markets, because it is a possibility that a rising tide will not lift all emerging market boats.  Certainly, this seems highly probable.  Highly probable that there will be a material disparity between the performance of one emerging market versus another. 

Debt levels in both Brazil and India are a cause for concern, although India (and Indonesia) do seem to be implementing genuine reform in their attempt to attract foreign investment.  Brazil, as well as Mexico and Argentina have been hit very hard by Covid-19, as have some regions within the African continent.  South Africa introduced fiscal and monetary measures in an attempt to minimise the impact of Covid-19, but it was already heading into an economic recession before lockdown, and we still have no real clarity about how the current incumbents will navigate the South African economy out of their woes.

Overall, many emerging economies are slowing as a result of the crisis. 

Currently, the central banks of Singapore and Hungary have debt moratoriums which are enabling corporate borrowers to stave off liquidity concerns.  What happens post this?  The likelihood is that we will see a divergence between companies – the haves versus the have nots.  Overall though, we will be witness to an increase in corporate defaults.  Defaults may also extend to sovereigns, particularly those facing costly ratings downgrades, and those that will struggle to provide sufficient liquidity to support local economies.

I currently find it difficult to muster material enthusiasm for emerging markets as a whole and it is likely that the golden era for emerging markets remains firmly behind us, at least over the short to medium term.  That said, there are likely to be certain sectors that lend themselves to investment, lend themselves to single country biases and some countries that remain well placed to provide medium to longer term investment opportunities.

Some of these opportunities appear to centre around innovation. 

Countries such as China, Japan, Singapore and South Korea seem to be mirroring the developed world’s focus on creating and commercialising intellectual property companies.  Furthermore, the technology spend within these geographies remains in an uptrend and will likely see them at the forefront in areas such as EdTech and mass technology training of the local population – China is delivering Artificial Intelligence as part of the school curriculum.

Covid-19 has increased our reliance on technology, has increased our data usage, has focused business leaders on how efficient workers can be albeit working from home.  Some Asian countries and companies appears to have positioned themselves as leaders in the field of technology, by, for instance, delivering free cloud services and free online education during the crisis.  These Asian technology companies have proactively and effortlessly adapted to changing needs during this pandemic.  These Asian technology companies will continue to grow long after Covid-19, local solutions but for global markets.

Emerging markets, countries and corporates will be challenged over the coming months and years and it feels easy to tar the entire universe with the same brush.  There will be plenty of corporates and sovereigns that appear unattractive and face a bleak outlook but there will be some that should thrive and that currently offer good value for the active investor.  The key is to be active and selective, the key will be to research thoroughly, the key will be to focus on specific themes within countries and sectors will and the key will be to take a long term view.  Now is not the time to adopt a passive and broad investment approach to investing into emerging markets.

Michael Zacharia

Investment Director

This article has been prepared for information only.  Any opinions or views expressed are for information purposes only. The views expressed herein are generally those of Swiss Global which sets the long-term asset allocation models, along with both the strategic and tactical allocation.  Any material is provided for informational purposes only. It is important to note that the value of any investment and the income derived from it can go down as well as up. It may be affected by exchange rate variations and you may not get back the amount invested. Past performance is not necessarily a guide to future performance and individual taxation circumstances may vary. You should consult your tax adviser if in doubt. Any information provided does not constitute a recommendation and you should consult your adviser, consultant or financial representative for advice concerning your specific circumstances.  Any opinions expressed should not be relied upon and are subject to change without notice.  This material is for the sole use of the intended recipient and is for distribution only under such circumstances as may be permitted by applicable law.

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