Emerging markets: More resilient than expected

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Personal Investing

24 June 2020

Part three of our series looking at how Covid-19 has changed investing and our views on markets.

Investors could have been forgiven for presuming that emerging markets would be hit particularly hard by the sudden combination of a pandemic and a global economic shutdown.

On both fronts, however, we have found that emerging markets in general have proved resilient. Consider the immediate impact of the coronavirus: our research indicates that, adjusting for the extent of the outbreak in each country, fatalities in emerging markets have been around 90% lower than in developed economies.

This trend cannot be solely attributed to under-reporting of incidents; we believe it is instead due to the favourable demographics in most emerging markets – compared to regions like the EU and North America, with their large populations of those born between 1945 and 1963, emerging market populations tend to be younger. If the trend holds, emerging markets could even be able to lift their lockdowns after shorter timeframes than developed markets.

So the virus has not disproportionately harmed emerging markets. But what about the collapse in international trade? Here, too, emerging markets have fared better than might have been feared.

Part of the reason is simply that emerging economies are now approximately 70% larger in purchasing power parity terms than during the last global crisis in 2008. This greater wealth, and the associated broader middle class with more secure jobs, has enhanced emerging countries’ capacity to absorb shocks.

For investors, this progress has been reinforced by policies across many emerging markets that have introduced flexibility in their currency exchange rates, greater regulation of banks, and business-friendly reforms. In the World Bank’s ‘ease of doing business’ rankings, China has thus climbed from 90th out of 181 countries in 2009 to 31st of 190 today; India has improved from 122nd place to 63rd.

And it isn’t only the largest emerging markets which have made these positive changes. In recent years, countries such as Ethiopia, Rwanda, and Angola have all worked more closely with the International Monetary Fund, providing more transparency for investors and receiving ratings for their credit-worthiness.

However, as investors we cannot be complacent. Careful research is still extremely important when making investment decisions in emerging markets. Some countries certainly appear to pose larger risks to future investment growth. For example, Brazil has struggled with its response to the pandemic. But through deep analysis, we believe there are opportunities to be found for investors in the more resilient emerging markets.

Remember, the value of any investment is not guaranteed. The value of investments and any income received from can go down as well as up and you may not get back as much as you had originally invested.

Parts one and two of our series looking at how investing and markets will be different for the rest of 2020 here  and here.

 

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Risk warning

Please remember the value of your investment and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest.

Please note the information, data and any references in this article were accurate at the time of writing. Please check the date of the content if you’re looking for up to date investment commentary or tax-year related information.

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