4 minute read
JPMORGAN
AROUND THE WORLD – EMERGING MARKETS
J.P.Morgan's Emily Whiting, Executive Director, Investment Specialist for the Emerging Markets and Asia Pacific Equities team takes a look at the effect of COVID-19 in the sector.
IIt is clear the COVID-19 has taken hold
of the world, its health systems and its financial markets. The required social distancing and shutdowns to control the disease have clear economic costs and we know that these measures cause disruptions in supply, demand, and financial realms – but we do not know how long these disruptions will last or how deep the damage will be. On top of COVID, the low oil price poses challenges for many emerging economies as well as the US. Thus, in our framework, we move out of muddle through and close to recession as these immediate disruptions equate to negative GDP growth expectations for 2020. Central banks and governments have certainly stepped up with unprecedented monetary easing and fiscal packages, but the boost from these efforts is yet to be seen. Markets have derated to account for the initial shocks, with the EM Price-to-book ratio now well below the long-term average. There are still many unknowns on the future path of markets, but we do know that historically these have proved to be attractive entry point valuation levels for the long term investor.
Globally, the primary challenge is that companies’ revenues and supply chains are being hit. The demand drag caused by social distancing measures means aggregate consumption will be hit globally. We look to distinguish between revenues that are permanently lost due to the quarantine versus revenues that can likely be made up after the virus risk clears, but keep in mind that solvency and business risks often flare up before an economic recovery can take place.
We have already seen central banks take emergency measures, including ad-hoc interest rate cuts and flexible quantitative easing programs. This can help mitigate the financial risks and liquidity issues businesses would face when revenues are scarce. Globally, large fiscal stimulus programs have been announced in a variety of areas. Fiscal responses in Europe and the US are unprecedented, and China’s playbook allows room for more government spending later in the year. However, the
fiscal room of many emerging markets is more limited. Emerging economies excluding China & Korea are also in the earlier phase of the disease spread, which means we do not yet know the extent of lockdowns and internal demand damage that will occur in the likes of India, Brazil, South Africa etc.
As COVID-19 continues to spread across the world, including through emerging markets, it is clear that its impact on economies and corporate earnings will be severe. Against that backdrop, we feel it is more important than ever to take a long term view on those areas in which a disciplined approach can add value. Having a consistent valuation framework allows us to identify where the markets look to be implying a more severe impact in the near term, than might reasonably be expected over a longer timeframe. We believe that the quality franchises with sustainable competitive advantages, consistent cash flow generation and strong management teams, which we hold in the portfolio, are well positioned to navigate the weeks and months ahead. n
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