Factors to consider – Developed versus emerging markets
Neither developed nor emerging markets is immune to the unexpected virus hit. Although the world’s growth outlook in 2020 turned doom amid COVID-19, here, we exhibit several reasons that emerging markets present more long-term opportunities than their developed peers.
From an economic perspective, emerging market, especially Asia, fares better than other regions. Developed economy’s GDP growth estimate made by the International Monetary Fund slid to an average contraction of 6.1%, compared to a 1.7% growth in 2019. The IMF cited lockdowns and restrictions on mobility – although essential to contain the virus – are “extracting a sizable toll on economic activity”. Moreover, these measures would negatively affect confidence which further weighs on economic prospects. Emerging market, however, is projected to come to a standstill. Albeit representing more than 5 percentage points below its average in the previous decade, emerging Asia is estimated to grow 1% year on year, being the only region with a positive growth rate.
- Currency strength
The U.S. Federal Reserve expanded its balance sheet to a record $6.42 trillion. In addition to a near-zero rate, the U.S. dollar strength may not sustain under an aggressive budget deficit – as much as 20% of its GDP. The softer greenback has traditionally favored emerging market assets. In our view, a bottoming economy will be a prerequisite for the emerging countries to ride on a weak US dollar.
- Relative valuation
Valuation in selective emerging countries is looking attractive after the recent corrections, bringing it back to the 2008 Global Financial crisis level. From a historical perspective, the hit rate of getting a positive return is high at this valuation level if history is any indication.
Over the near term, market risk may continue to loom. We spot near-term risks as the spread of COVID-19 leading to the unforeseeable retrieval of production lines and transportation between countries, the increasing tension between U.S. and China, also conflicts among different countries, the commodity risk brought by the excess supply of and shrinking demand for oil, surging global unemployment rate, increasing unemployment benefit burden to the government, interest rate risk, exchange rate risk, equity risk, credit risk.
We expect a U-shape recovery trajectory, implying that upon reaching the bottom, we hover around the trough for some time before a rebound.
Our conviction: North Asia
Although the emerging world stands with a better shape in growth and valuation, it does not necessarily mean the entire group of markets is attractive enough to place our conviction. At this point, the pace and eventual magnitude of recovery can diverge a lot.
First off, Southeast Asia is of much concern in their fiscal health and currency vulnerability – in particular Indonesia. The sub-region also faces foreign capital flight and unfavorable liquidity situation to equities investors.
On the contrary, China, Taiwan and Korea markets stand out as they surround the development of the next generation of mobile networking.
China’s progressive and strategic ambition in 5G-network development should play out as a major catalyst to related hardware and infrastructure component makers located in Taiwan and Korea.
While the U.S. limits chip export and steps up scrutiny, some mainland companies seek suppliers within China and Asia’s region. The tendency of sourcing domestically supports the development of and demand for technology hardware in China market.
The localization trend is epitomized by Taiwan’s export resilience despite the COVID-19 escalation. The island’s technology-related exports in March continued to show a robust growth year on year supported by China’s demand after resuming business activities. Electronic component exports hit a new high during the month, even offsetting weakness in material and industrial figures.
Over the next quarter or so, we will continue to monitor the impacts the virus disruption and lockdown have on global demand and export-dependent countries such as Taiwan and Korea. We believe this should provide us with some guidance on how this round of near-term disruption would swing the medium- to long-term earnings outlook and technological development.
The views expressed are the views of Value Partners Hong Kong Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All material has been obtained from sources believed to be reliable as of the date of presentation, but its accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
This commentary has not been reviewed by the Securities and Futures Commission of Hong Kong. Issuer: Value Partners Hong Kong Limited