Flash commentary

Views from our Emerging Markets and Asia Equity team

14 Apr 2020

At the country level, the situation varies by region as countries are at different stages on the epidemic curve. Governments have had to trade controlling the outbreak on one hand, with the associated economic impact on the other hand.

China and some other Asian countries have weighed more on the side of control early on with other countries partially following suit now. Meanwhile, China is now slowly ramping up its economic activity - a lot depends on whether businesses can reopen without the rate of infections going back up to previous highs. In addition, the collapse of oil prices has increased volatility in the market in addition to the evolving Coronavirus situation.

On the sector level, not all industries are equally impacted. We observe four trends that are accelerating in EM, including:

  • Ongoing consolidation within many industries as smaller firms struggle;
  • Shift from offline to online across business segments, for example in China this includes after-school tutoring, financial services, and healthcare diagnosis;
  • Investment in R&D and innovation, driven by growing demand for automated solutions;
  • Shifts in supply chain; South-East Asia and India could benefit, plus reshoring back to US, Korea, Japan

How are we responding?

We expect companies with high fixed costs, high debt and/or high expenses to face difficulties riding out this storm. These are mostly smaller players in the unlisted equity space.

We have asked our analysts to look for companies that are strong enough to withstand severe economic dislocation for 12-24 months – these are typically companies with a combination of low fixed cost, low interest burden, and low operating expenses. We will also look to identify those companies which have the most upside as and when the situation normalizes. Whenever we find opportunities to add companies that meet this criteria, we will make trades.

Even going into the downturn, our portfolio had been tilted towards companies meeting the above criteria – with better balance sheets and higher ROEs than the broader market at large.

Hence, we have not increased defensive stocks like telecoms and utilities, because these are not the ones with the most upside. Healthcare companies on the other hand are defensive and have a higher upside potential.

While we aren't able to do our "boots on the ground" research for the time being, we still have our ears to the ground. We have ramped up talking to our network of contacts, industry experts and company representatives. And while we are working in BCP (business continuity plan) mode, with many of us working from home, our processes and operations continue to work well.

EM markets remain volatile with some selling pressure and poorer liquidity but we are still able to affect any desired portfolio changes.

Our stock selection within consumer discretionary, health care and consumer staples added to performance. In contrast, stock selection within energy and financials detracted as the oil price collapsed and banks across countries have borne the most impact of the downturn.

Our Portfolio Managers and Specialists are available to respond to any specific enquiries.

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