After the first wave of the COVID-19 outbreak in China and East Asia, and the second wave in Western Europe and North America, a third wave looks to be building in emerging markets (EM) which will likely be followed by recessions in those regions.
According to analysis from Amundi Asset Management, EMs that relied on an open economy, global supply chains and tourism would be the hardest hit.
“EM and frontier countries may be able to benefit from the experiences and best practices then put in place in countries affected by the pandemic earlier,” the firm said.
“However, most of them do not have well-equipped health systems and lack the resources to deal with a health emergency vs developed countries.
“Recession in emerging markets is materialising, with major uncertainties regarding its depth and length.”
From a longer-term perspective, COVID-19 could be a driver that reinforced “de-globalisation” which had already started to trend.
“This will lead to a focus on new investment opportunities within ‘specific regions’ beyond the traditional geographical perspective,” the firm said.
“The new Silk Road is one important example of this concept, based on the growing influence of China in the geopolitical landscape and beyond Asia.”
Amundi had devised a stress ranking system, which pointed to countries like South Africa, Colombia, Hungary or Malaysia being more exposed to risk.
“The combination of recessionary growth rates, a strong US dollar, and very low oil prices could trigger rating downgrades, currency crises and defaults in the worst cases,” it said.
“In order to assess the difficulties that EMs are experiencing, we need to evaluate fiscal fragility and external vulnerabilities.
“As a simple matter of fact, fiscal metrics in 2020 are going to deteriorate based on recessionary level of growth and fiscal measures implemented to address the COVID-19 crisis.
“At the same time, a strong US dollar or a weak local currency increase external vulnerabilities.”
Emerging Markets risk assessment
Source: Amundi Research based on CEIC, IMF and WTO data, as at 15 April, 2020
According to data from FE Analytics, within the Australian Core Strategies universe, the emerging markets equities sector had a loss of 14.48% in Q1 and no funds saw a positive return.
The best performing funds over the last quarter were CFS Wholesale Global Emerging Markets Sustainability (-7.42%), GQG Partners Emerging Markets Equity (-7.47%), GMO Emerging Markets Trust (-7.77%), Northcape Capital Global Emerging Markets (-9.74%) and Paradice Global Emerging Markets (-10.27%).
Paradice was a new fund, which had only launched on 15 May, 2019, and its top holdings included Alibaba, Tencent and Taiwan Semiconductor Manufacturing.
This was common in other top performers, as GQG had the same top three, while GMO held Alibaba and Taiwan Semiconductor Manufacturing in its top three.
In its market review, Paradice cited Tencent as one of the key performers for the fund in its function as an entertainment source and utility provider during the crisis.
“As the undisputed leader in mobile gaming, it is benefitting from a surge of interest and time spent on its key titles as consumers look for alternate forms of entertainment while spending more time at home,” it said.
“The company has been playing a pivotal role in helping offline companies quickly transition online via mini programs.
“While consumer behaviour will certainly normalize to a degree, it is fair to expect that many of these new behaviours that benefit Tencent will prove quite sticky.”
Best performing emerging market equity funds v sector in Q1 2020
