CIO at Franklin Templeton highlights compelling investment potential across different markets
In the aftermath of the economic and financial earthquakes set off by COVID-19, fault lines have been exposed between countries, sectors, and companies, with some emerging stronger and better off as others weakened. And the economies that have managed to dull the first-order impacts of reduced mobility and lockdowns are well-positioned to outperform in 2021.
That was the view shared by Manraj Sekhon, CFA and chief investment officer, Emerging Markets Equity at Franklin Templeton, in a recent commentary.
“The challenges of 2020 have highlighted structural advantages and other beneficial secular trends in emerging markets that bode well for 2021,” Sekhon said.
Front and centre among those challenges is the impact of the pandemic. Because of the reduced need for lockdowns and movement restrictions, as well as more limited disruptions to supply chains and consumption, countries that have been able to minimize infections and deaths have suffered less drastic declines in GDP.
This year, he said, the world should brace for second-order shocks such as fiscal and monetary macroeconomic risks arising from the unprecedented stimulus unleashed by countries across the world. Within and between countries, there’s the exacerbation of inequality, which aggravates the threat of political instability.
“Less susceptible to these risks will be those countries that were better able to minimize disruption during 2020, notably East Asian emerging markets,” Sekhon said.
He said that East Asia is well positioned to lead global markets. China is expected to be the sole country to see GDP growth in 2020, thanks to the diversified domestic economy undergirded by innovation and digitalization. As well, high-quality companies are emerging as they benefit from market consolidation and booming domestic consumption.
“Taiwan and South Korea are beneficiaries of the structural growth in information technology (IT) hardware, as well as the diversification of global technology supply chains,” Sekhon said.
He pointed to the continued simmering of geopolitical tension between China and the U.S. as a key headwind that’s likely to remain irrespective of who holds the U.S. presidency, driving a wedge between the two in the technology sector. But that’s counterbalanced, Sekhon said, by continued liberalization in China’s financial markets.
“Investor interest in China’s domestic A-share markets is rising alongside increased bond market flows as China is added to international indexes,” he said, arguing that it will likely prompt a new U.S. administration to adopt a more constructive tone in support of U.S. companies’ economic imperative to grow, develop, and sell into – as well as source from – China.
While the ASEAN (Association of Southeast Asian Nations) region and India have trailed in COVID-19 normalization, they’re showing signs of gradual economic reopening supported by the demographics of younger, less susceptible populations. Regulatory change, global supply chain diversification, and room for consumption growth from a low base also represent healthy longer-term prospects.
“India has seen surging COVID infections, but with mortality having been contained, economic reopening has continued,” Sekhon said. He pointed to the country’s IT services sector as an industry poised for revival, while the country’s manufacturing space could benefit from global efforts to diversify supply chains.
In Latin America, he said, there’s been a COVID-driven acceleration of lower interest rates and digitalization, as well as new life in the mining industry powered by the global rebound in manufacturing boosted metal prices.
And while the political climate in Brazil has been tempestuous, the country’s focus on economic reform is leading to a structural decline from its historically high real interest rate. The central bank’s decision to bring its policy interest rate to a record low, he added, could catalyze longer-term credit growth as the cost of renegotiating or restructuring loans comes down. Other positive signals include credit penetration far below many other markets, negative real rates, and a long-term trend of “equitization” of investments.
“Challenges remain in Brazil, however, including rising debt levels as a result of stimulus measures, paired with uncertainty surrounding continued economic reforms amid a politically fragmented environment,” Sekhon said, suggesting the possibility of upward pressure on longer-term interest rates. “The planned end of emergency aid in place to support those impacted by lockdown measures could also impact economic recovery.”
South Africa, he added, also showed green shoots of optimism. Under President Cyril Ramaphosa, he said, the country is set to undergo an array of reform measures including redirected public spending toward infrastructure and re-industrialization, spending cuts centred on a wage freeze for civil servants, and efforts to address corruption.
“This broadening of economic recovery should continue to drive improved earnings visibility into 2021 and amounts to a compelling opportunity across emerging markets as a whole—both from a near-term tactical perspective as well as structurally,” Sekhon said.