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Three Things We’re Thinking About Today
- Along with other major economies in the world, India has taken bold steps to contain the spread of COVID-19. It enforced a complete lockdown on March 25 by sealing international borders and restricting domestic travel. While the government subsequently extended the lockdown period into May, some restrictions were relaxed in selective states with limited or no new cases. The differentiated restoration of some normalcy with specified conditions should help the economy to gradually restart. The government also announced a US$22.6 billion economic stimulus plan, providing relief for those millions affected in lower-income households. The Reserve Bank of India (RBI) provided additional support, stating it would do “whatever it takes” to support the economy and maintain its accommodative stance, which helped restore some confidence in financial markets and boost liquidity. For companies, we think balance sheet resilience is now crucial as the impact on businesses largely hangs on when the economy will reopen.
- Adding to Brazil’s COVID-19 woes, political uncertainty heightened in April following the resignation of the country’s popular justice minister and the president’s dismissal of the country’s health minister. Although the number of COVID-19 cases in Brazil surpassed 100,000 in early May, some states and cities have started to ease restrictions to help reduce the economic impact of the outbreak. The government has also announced fiscal measures to support the population and economy, while the central bank lowered its key interest rate to a record low level in recent months. A key concern for Brazil, however, is its high debt/gross domestic product (GDP) level, which will increase further as a result of the fiscal stimulus. Assuming a one-off impact over 2020, debt/GDP levels could decline over the longer-term as the country refocuses on much-needed reforms. While the short-term situation in Brazil remains volatile, we remain positive on Brazil over the longer term and continue to favor domestic-oriented themes including financials, infrastructure and consumer-related sectors, which we believe should benefit from the country’s economic recovery.
- We have started seeing signs of recovery in the information technology sector, with the MSCI Emerging Markets Information Technology Index rebounding over 20% from its recent low in late-March.1 In times of crisis, businesses tend to adapt accordingly, and embrace technology much more quickly. This is what we have witnessed in recent months, with many businesses moving from offline to online. Education is a good example of that; schools have embraced the use of online technologies to provide a learning platform for students. E-commerce, internet and software companies are also benefiting from an increase in online activities. Acceleration in internet usage and penetration will continue driving growth in cloud and other network architecture, increasing demand for servers and other memory intensive devices. Additionally, we expect China and other major economies to continue to push forward with their 5G (fifth-generation wireless technology standard) rollout, which will support growth for suppliers into that industry. Over the long term, technology evolution and digitalization is expected to continue. In our view, the current situation will probably accelerate the adoption and development of some of these themes going forward.
COVID-19 will negatively impact global growth in the short to medium term. The extent to which developed markets can contain the spread of the virus (the number of new cases in the United States and Europe has already started to moderate)—and thus the severity and duration of the global economic impact—remains critical. We have also seen some European economies gradually returning to normalcy, while some US states have also started to relax restrictions. In Asia, the situation in economies such as China, South Korea and Taiwan continues to improve. Several major emerging markets (EMs) including Russia, India and Brazil, however, could see further pressure ahead.
In the last decade, we have seen substantial institutional reform in terms of central bank and fiscal policy as well as market reform across emerging markets. The breadth and depth of emerging markets have also increased greatly in the sense that these economies are becoming more domestic-orientated from export- or commodity-oriented. Additionally, we are seeing a lot more representation of newer trends such as digitalization, technology and health care in the global economy, with the COVID-19 crisis accelerating some of these trends. And when you put this together with the fact that the financial positions of EM economies and companies were relatively solid going into this crisis, we believe that their ability to deal with this crisis is a lot greater than in similar crisis periods.
Historically, crises tend to be a spur for greater innovation, more resilience and adaption to newer challenges. Over the last decade, we have also seen emerging markets leapfrog developed markets in terms of technology and new systems. We believe the current crisis is likely to spur on more leapfrogging in the next year or two.
Across our portfolios, we remain positioned in long-term themes including consumption premiumization, digitalization, health care and technology. These stocks reflect our philosophy of owning good-quality businesses with long-term sustainable earnings power at what we consider to be a discount to intrinsic worth. We see leverage as a risk, and continue to avoid companies with weak balance sheets. We believe that this approach should help us best navigate coming months and, over time, we expect the long-term fundamentals of our holdings to remain intact.
Emerging Markets Key Trends and Developments
EM equities rebounded in April, but to a smaller extent than developed market stocks. Optimism around an experimental COVID-19 treatment, plans by major economies to relax coronavirus-related restrictions, and more policy stimulus globally helped investors look past recession forecasts and weak economic data. Oil prices were volatile, with US crude oil futures prices turning negative during the month before swinging back into positive. The MSCI Emerging Markets Index increased 9.2%, while the MSCI World Index returned 11.0%, both in US dollars.2
The Most Important Moves in Emerging Markets in April 2020
Stock markets across Asia staged a comeback last month, as investors’ risk appetite returned on hopes for a pick-up in global economic activity. Indian equities rallied, aided by central bank measures to boost liquidity in the financial system. Stocks in Thailand and Taiwan surged amid falling numbers of new coronavirus cases and additional economic stimulus in both markets. China’s stock market rose but trailed its regional peers following its relative resilience in the previous months. Investors focused on China’s exit from lockdowns and further policy support, pushing Chinese equities higher despite a first-quarter economic contraction and mixed signs of recovery.
Latin American markets rebounded in April but lagged their EM counterparts as the continued spread of COVID-19 across the region weighed on market sentiment. Although benchmark equity indexes in Brazil and Mexico recorded positive returns, Chile, Argentina and Peru led regional performances. Weakness in the real and increased political uncertainty following the departure of two key ministers held back returns in Brazil. Sentiment in Mexico was impacted by news of a 1.6% year-on-year contraction in the first quarter of 2020 and a sovereign credit rating downgrade. However, the central bank’s surprise 0.5% interest rate cut provided some relief to investors.
Markets in the Europe, Middle East and Africa region were among the leading EM performers in April, on improving global sentiment driven by unprecedented fiscal stimulus and monetary easing efforts globally. With a stronger ruble offering support, the Russian equity market ended the month with double-digit returns in US dollar terms. Authorities announced additional stimulus measures and cut the key interest rate by another 50 basis points3 in April as efforts to mitigate the impact of COVID-19 continued. South African equities rallied as investors chose to overlook sovereign credit downgrades and focus on the government’s plans to gradually ease the nationwide lockdown from May onwards. Investors were also encouraged by continued fiscal and monetary easing measures, including an unexpected 1% cut in the benchmark interest rate.
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What Are the Risks?
All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.
1. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or guarantee of future results.
2. Source: MSCI. The MSCI Emerging Markets Index captures large- and mid-cap representation across 24 emerging-market countries. The MSCI World Index captures large- and mid-cap performance across 23 developed markets. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or guarantee of future results. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. Important data provider notices and terms available at www.franklintempletondatasources.com.
3. A basis point is a unit of measurement. One basis point is equal to 0.01%.