Capital Ideas^™

While each crisis is different, what is striking about this global pandemic is that (excluding China) the impact on emerging market assets appears to be more dire than the spread of the virus itself to those countries.

The good news is, a global recovery appears to be underway. As investors move from safe haven assets towards risky assets, capital flows into emerging markets could increase, which would create a favourable environment for emerging market equities.

With US interest rates expected to stay lower for longer, central banks in emerging markets could reduce interest rates further and enable cheaper financing for emerging market companies. These factors bode well for emerging markets, as a low interest rate environment could drive the continued search for yield alongside a pick-up in earnings growth.

 

Reality check

Emerging markets today consist of more than 60 countries with varying fundamentals, different economic growth patterns and often widely diverging company valuations. While emerging markets have developed, they constitute only 12%¹  of the global equity market. Yet emerging markets are the key drivers of global growth, accounting for a significant share of the world’s GDP and global growth.²

A similar trend can be observed at the company level, where select global companies derive a large amount of their revenues from emerging markets (as discussed in the investment insights “Emerging market equity investing and the role of geographical boundaries”). Revenue contributions from emerging markets have been growing for some companies, outpacing revenue growth from developed markets.

 

1. Data as at 30 September 2020. MSCI Emerging Markets Index market value as a % of MSCI All Country World Index (ACWI). Source: MSCI

2. Data as at April 2020.Source: International Monetary Fund: World Economic Outlook database

 

Risk factors you should consider before investing:

• This material is not intended to provide investment advice or be considered a personal recommendation.
• The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
• Past results are not a guide to future results.
• If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease.
• Depending on the strategy, risks may be associated with investing in fixed income, derivatives, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.