Impact Blog
A look at emerging markets and COVID-19

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Calvert disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Calvert are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Calvert fund. References to individual companies for Engagement or Research purposes are provided for illustrative purposes only and may not be representative of the results of all of Calvert’s engagement efforts. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Kunjal GalaCo-Portfolio Manager, Federated Hermes, Calvert Subadvisor

      London - Since the outbreak of the COVID-19 pandemic, with widespread disruption to global markets and economies, we have seen divergent outlooks for various emerging-market (EM) countries and their local economies. A key issue is increased concerns over the debt repayment capacity and US-dollar (USD) liquidity needs of emerging markets.

      A global recession invariably means a reduction in USD funding, raising the issue of how EMs will fund external deficits amid a sharp slowdown in capital inflows. On this metric, Turkey, Malaysia and South Africa appear to be the most vulnerable due to low import cover and high external debt. Commodity-sensitive markets like South Africa, Saudi Arabia and Brazil - and tourism-dependent regions, such as Southeast Asia - are also high risk in this environment.

      In China, Korea and Taiwan (which together make up 65% of the MSCI Emerging Markets Index), however, the virus now has been largely controlled. With Asia weeks ahead in the coronavirus pandemic, local companies can offer some hope to the rest of the world that adaptation and endurance is achievable - with the right backers and balance sheet.

      Attractive valuations

      Bear markets are generally characterized by low valuations, which we can see across global markets today. EM equities are already discounting the negative impact of the outbreak to a much greater degree than developed markets. Meanwhile, the price-to-book ratio for EMs is at a 38% discount to developed markets, up from 30% at the start of 2020 and far above the long-term average of 16% (Figure 1). This is a remarkable difference, given that EM companies are delivering a return on equity in line with developed markets, recognizing that both will take a substantial hit in 2020.

      0415EMValuation

      Secular drivers intact

      The EM structural growth story remains intact, being driven by an aspiring, growing middle class, rising digitization and governments committed to reform and development, particularly infrastructure. We retain our focus on the long-term structural themes of 5G, digitization, the internet of things, rising financial penetration, health care and infrastructure. We expect all of these elements to outperform amid the ongoing economic uncertainty associated with the global spread of the virus, weak commodity markets and potential credit-quality issues.

      Shifts we see post-virus

      Medium to long term, several shifts are likely to happen to global supply chains, travel and tourism, use of technology and household behavior. We believe emerging manufacturing hubs in areas like Vietnam and Mexico will benefit as they de-risk their supply chains. People are likely to favor local tourism for a while, with places like Macau being a popular option for the Chinese. Health care will also benefit, as countries are likely to boost spending on medical research and equipment to fill gaps in their preparedness. Governments are also likely to ramp up investment in technology (as a driver to boost productivity and growth) with areas like entertainment, commerce, food delivery and education particularly benefiting from the shift from in-store/offline to online. These areas is where our investment focus lies.

      Bottom line: Emerging markets may offer a wealth of opportunity, with discounted valuations, competitive return on equity and long-term, secular drivers of growth intact. Although we don't expect markets to head straight up from here, the next few months may provide a great window for capturing EM investment opportunities.