Coronavirus-induced lockdowns have wreaked havoc on the global economy. Among emerging and developing countries, those that are heavily dependent on global trade, tourism, commodity exports, and external financing are likely to be the hardest hit, according to the World Bank. The consequent decline in per capita incomes could tip millions into extreme poverty.¹

Taking a long-term view, however, the outlook for emerging markets is not as dim as it currently appears. Secular growth trends that existed long before the coronavirus outbreak could continue to flourish in the next decade. Among them are the growth of digital platforms targeting large and growing consumer bases, the emerging middle class which is changing purchasing patterns at unprecedented speed, the growth of mobile technology, as well as the rapid adoption of mobile devices.

That said, a great deal of uncertainty lies ahead for investors, ranging from the pace of China’s economic recovery, to the success of quarantine measures and the stability of commodities prices. In this market environment, deep, fundamental research is key in identifying investment opportunities.

 

A chance at achieving growth

Almost by definition, once a country achieves a more middle-income status, that country becomes more integrated into the global economy. The result is that these countries are beholden to the fortunes of the global economy and for the past decade, most of the developed world has been stuck in a debt-riddled, austerity-driven, economic rut.

What emerging markets need instead is a growth stimulus on a large scale that is both domestically and externally driven. This is important because without growth, the debt build-up may be unsustainable over the long term.

“For emerging market countries, growth is the lifeline and the only path out of another lost decade. The pandemic-driven crisis might, ironically, give emerging market countries a chance at achieving growth,” says fixed income portfolio manager Kirstie Spence.

 

Emerging market investing: Index-level versus an actively managed approach

Emerging market equities had lagged the global market in the decade after the start of the global financial crisis. But the story of the next decade can be different as industries transform on the back of technology disruption.

Will emerging markets fare well against developed markets in the new decade? Evaluating securities on a company-by-company basis, instead of on an aggregate basis, can provide a diverse perspective. The following chart shows that stocks from emerging markets triumphed those of the developed world in generating the best annual returns during select years, and vice versa.

 

Number of top 50 stocks each year by company location

Past results are not a guarantee of future results. Data as at 31 December 2019 in US dollar terms. Sources: MSCI, RIMES Top 50 stocks are the companies with the highest total return in the MSCI ACWI each year. Returns table uses S&P 500 and MSCI ACWI ex USA indices for US and non-US, respectively.

 

The company-by-company approach is even more pronounced over the hardest-hit months of the coronavirus pandemic,² where the list of investable companies with the best year-to-date returns is dominated by Chinese firms.

In the new decade, the trend of strong returns for emerging market stocks could continue as these firms evolve through innovation, build substantial scale and leapfrog their competitors from the developed world in terms of technology advancements. HDFC Bank and Kotak Mahindra Bank, for example, are leveraging technology amid the digitalisation of India’s economy to make faster lending decisions and reach customers in rural areas through mobile apps. However, both companies are not included in the MSCI Emerging Markets Index due to foreign ownership restrictions.³

 

1. June 2020 Global Economic Prospects. Source: The World Bank

2. Year-to-date period through 31 May 2020. Sources: MSCI, RIMES

3. Data as at 31 August 2020.

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.