Whilst there are encouraging signs of a return to normal business activity in some emerging markets, others are still seeing coronavirus cases and deaths rise from day to day. As in developed markets, the long-term impacts on emerging economies remain uncertain.
Investment companies in the Global Emerging Markets sector have reflected these mixed fortunes, with the average company bouncing back 7% in April1, after losses of 15% the previous month2. For investors prepared to take a long-term view, could current valuations provide an attractive entry point?
At a media webinar today hosted by the Association of Investment Companies (AIC), Andrew Ness, Portfolio Manager of Templeton Emerging Markets Investment Trust, Mario Solari, Portfolio Manager of Genesis Emerging Markets Fund, and Ross Teverson, Co-Manager of Jupiter Emerging & Frontier Income Trust, discussed how they are dealing with the impact of coronavirus and their outlook for emerging and frontier markets.
Their views have been collated alongside comments from Michael O’Brien, Manager of Fundsmith Emerging Equities Trust and Austin Forey, Manager of JPMorgan Emerging Markets Investment Trust.
COVID-19 – China holding up better
Ross Teverson, Co-Manager of Jupiter Emerging & Frontier Income, said: “Going into 2020, we remained focussed on identifying those companies which in our view are exposed to specific or structural positive change that is underappreciated by the market. As a result of our fundamental stock picking process, we have consistently been underweight China, favouring higher conviction ideas in overlooked markets, including Turkey, Mexico and Russia.
“Though the COVID-19 outbreak originated in China, the Chinese market has surprisingly held up better than the rest of emerging markets and our underweight position has acted as a headwind for us, as has our higher allocation to smaller companies. We have not significantly altered positions within the portfolio, as we believe that the long-term investment case for our holdings remains intact and that the companies in which we invest are well positioned to weather the economic impact of coronavirus.”
Mario Solari, Portfolio Manager of Genesis Emerging Markets, said: “Our China domestic A-share investments have been among the most resilient year-to-date. There seem to be several reasons for this. One is fundamental; China appears to have successfully controlled the number of new COVID-19 infections, even while releasing restrictive measures. Buoyed by this containment success, many management teams we have spoken to are optimistic about a ‘V-shaped’ recovery, especially in the second half of the year.
“That said, a key next question is the degree to which falling global demand for manufactured exports will undermine hopes for a rapid economic rebound in countries like China, Korea and Taiwan.”
Andrew Ness, Portfolio Manager of Templeton Emerging Markets, said: “At a time when coronavirus-driven country shutdowns have exacerbated investor concerns, the crisis hasn’t altered our investment philosophy towards emerging market stocks. We continue to favour competitive, well-managed companies with long-term sustainable earnings power and attractive valuations. Our approach has been calm and rational, without panic. Hence, we have not made significant changes to our portfolios on account of the crisis. However, we have reduced or exited some investments in companies where we believe there is a longer-term negative impact on the business or where share prices have not corrected in line with the expected negative impact on the business.”
Opportunities and risks
Mario Solari, Portfolio Manager of Genesis Emerging Markets, said: “We have been busy reassessing the range of outcomes for our portfolio holdings. Some portfolio holdings have benefitted from social distancing. NetEase, for example, a leader in the Chinese video game market, has seen a boost in user engagement, as social distancing and the temporary closure of schools has increased the consumption of digital entertainment. Recent data indicates 60% to 70% of Chinese gamers increased playing time during the outbreak. By contrast, the impact on our Indian bank holdings has been more negative. India has a young population, but a weak public healthcare system, and the country is in near lockdown in most areas. This exacerbates the economic slowdown we have seen in the last couple of years.
“During this period of extreme volatility we have been assessing dislocations between share price moves and underlying fundamentals, taking the opportunity to upgrade the quality profile of the portfolio.”
Austin Forey, Manager of JPMorgan Emerging Markets, said: “At the industry level, e-commerce companies, media content companies including mobile games developers, food retailers and pharmacies are net beneficiaries of the nature of this downturn. On the other side, businesses associated with travel and those reliant on physical stores – restaurants, fashion retail – are under pressure. The sell-off has been pretty indiscriminate; it’s created some opportunities in companies we liked fundamentally but which previously looked expensive, especially in areas like IT services, e-commerce and mobile gaming.”
Ross Teverson, Co-Manager of Jupiter Emerging & Frontier Income, said: “We certainly see longer-term opportunities being created in companies that offer a combination of low valuations and very strong balance sheets – around a third of the portfolio is in companies with net cash on their balance sheets. We see these qualities in companies across a diverse range of sectors and markets, including our holdings within Taiwanese tech, Chinese pharma, Indonesian property and Pakistani autos. Beyond the risks presented by coronavirus, we would highlight political risks in emerging and frontier markets as being significant, yet difficult to forecast.”
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