This post is also available in: Spanish
Our emerging markets equity team has found that outdated misconceptions of the asset class still exist. We believe it’s worth dispelling some of these myths and highlighting the new realities we see. This first post in a three-part series examines how policy improvements in emerging markets could increase resilience in times of stress.
New Reality #1: Policy improvements should contribute to increased resilience during times of stress.
In decades past, many emerging markets had large external imbalances, current account deficits and large fiscal deficits.
However, many emerging markets have learned lessons from prior crises to strengthen and reposition their economies. Today, many emerging markets have less debt in comparison with developed markets across governments, corporates and households. Debt to gross domestic product (GDP) is approximately 50% across emerging markets, roughly half that of developed markets overall.1 The chart below also shows that not only is public debt generally lower, but household debt is also lower across emerging markets, and when excluding China, corporate debt is also lower.
We believe less debt across an economy means governments are more likely to loosen their purse strings if necessary during periods of stress without creating a fiscal crisis—and businesses and households can better survive economic downturns.
Over the past two decades, we’ve seen signs emerging market economies have been able to increase foreign exchange reserves, in addition to steering borrowing away from US-denominated debt. This signals to us that emerging markets are less likely to be vulnerable in periods when the US dollar strengthens against the local currency.
Emerging markets have made continuous improvements with more effective banking sector oversight and supervision. Going into this COVID-19 crisis, the high levels of oversight, regulation and capitalization mean that banks across most emerging markets should be able to weather this crisis. It would take a significant level of economic pain to impair bank balance sheets, in our view.
Examining corporate balance sheets can help identify the resilient companies during this crisis—and potential winners from an investment standpoint. The chart below highlights how emerging-market corporates in select areas have more cash on hand and less debt than corporates in Germany, the United States or United Kingdom.
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.
While the coronavirus outbreak has tested the resilience of emerging markets, we think some of the changes that have taken place in these economies over the past few decades should help them weather the COVID-19 pandemic. In our view, lower levels of debt, higher levels of foreign exchange reserves, improved banking systems and stronger corporate balance sheets are indicators that emerging markets have come a long way from times past.
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.
Companies and case studies shown herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The opinions are intended solely to provide insight into how securities are analyzed. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio. This is not a complete analysis of every material fact regarding any industry, security or investment and should not be viewed as an investment recommendation.
Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT 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 FT 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, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s 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, in addition to those associated with these markets’ smaller size and lesser liquidity.
1. Franklin Templeton Capital Market Insights Group, International Monetary Fund, Macrobond, March 2020.