Investment Adventures in Emerging Markets


Coronavirus: Signs of Normalcy Emerge as China Re-Opens

As China has started lifting lockdown restrictions, its economy is slowly getting back on track. Franklin Templeton Emerging Markets Equity’s Andrew Ness looks at the latest developments in Asia, and considers how some cash-rich companies in North Asia could prove survivors of the crisis.

This post is also available in: Italian

Many investors think we could be on the cusp of a major global depression as a result of the coronavirus, but we don’t think that will happen. It’s been helpful to have our boots on the ground across mainland China and in Hong Kong so we can hear how our colleagues in the country and region have been dealing with getting back to normalcy, particularly those who had been in a government-enforced lockdown for much of the first quarter.

While we have seen a few clusters where the virus has resurged in recent days after lockdowns were eased, events by and large in China are giving us hope: the re-opening of factories, migratory workers going back to work since January’s Chinese New Year celebrations, and industrial activity returning to at least 90% capacity utilization. As other emerging economies come out of lockdown, we’ll be watching closely whether consumers will behave as they were before the coronavirus.

It’s too soon to describe what a broad economic recovery will look like, but we believe China and other trade-sensitive neighboring economies will have to be more reliant on domestic recoveries, given the short-term challenges they face with disrupted global trade routes.

Cash-Rich Companies in Asia Could Prove Survivors

Historically, many companies in China, Taiwan and South Korea that had large cash reserves attracted negative attention due to the potential impact such cash reserves could have on long-term profitability. While some cash reserves can be beneficial, having too much cash stockpiled rather than invested can mean it’s not being put to work to grow the business.

However, the massive piles of cash some companies today are sitting on could provide a vital buffer against the dour economic climate. Companies without such reserves, whether in Asia or the United States and United Kingdom, could suffer in comparison.

In our view, this helps us identify the survivors from this crisis—and potential winners from an investment standpoint. As you can see in the table below, the balance sheets of more companies in Asia are tilted toward cash than in the United States, United Kingdom or Germany.

Certain regions in Asia appear to be more resilient than others. Domestic recoveries in countries in North Asia, such as South Korea, Taiwan and mainland China in particular, appear more robust. The countries also seemed better prepared to deal with the coronavirus than some other developed parts of the world.

Looking ahead, it raises bigger questions over characterizations of a developed economy—whether average wealth levels, or a country’s preparedness to protect its citizens in periods of crisis—should fall under the definition.

Insatiable Demand from Consumers

While the economic impact of the virus will weigh on many emerging market economies in the short term, the consumer trends we’ve been witnessing for some time are likely to remain relevant. Goods and services related to health and wellness were a fast-growing trend prior to the crisis, and we think this theme will remain broadly intact post-crisis—perhaps even moreso.

Additionally, there is strong demand for goods and services such as cars, high-speed broadband, life insurance and home ownership (and therefore, banking products like mortgages) in emerging markets, where penetration remains low. We don’t think the virus will ultimately change those wants and needs.

Middle-class and affluent consumers in Taiwan, China, India, Russia and Brazil, for example, should carry on trading up for higher-quality goods and services, as consumers in developed markets have done. To us as investors, those areas represent potential opportunities as we move past the current crisis period.

To get insights from Franklin Templeton delivered to your inbox, subscribe to the Investment Adventures in Emerging Markets blog.

For timely investing tidbits, follow us on Twitter @FTI_emerging and on LinkedIn.

Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FTI affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236,—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton Investments’ U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

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.

Get Content Alerts in My Inbox

Receive email alerts when a new blog is posted.

Leave a reply

Your email address will not be published. Required fields are marked *