Covid variants delay, do not derail the rally in emerging markets


New coronavirus variants have held emerging economies back so far this year, while also generating dire human costs in countries like India.

In 2021, stocks had outperformed the market widely used to excelSome investors argue that trading should continue to work but has “delayed” it until later in the year.

Carmignacs Xavier Hovasse (pictured) is an emerging markets manager who started the year as a bull but acknowledged it hadn’t worked out so far. “I think the main reason is the new strains,” he said.

Citywire’s AAA-rated manager said Brazil and India, as both “devastated” by Covid-19 variants, have also hit their currencies and stock markets, which are large constituents of the emerging markets index.

At the same time, East Asian powerhouses like China and Korea showed less buoyancy than last year, while the US recovery picked up pace as its vaccination campaign progressed. The recovery in the US economy strengthened the dollar and created further headwinds.

Year to date, the MSCI Emerging Markets Index is up 4.1% in sterling terms, nearly half the 8.3% increase in the MSCI World Index, which tracks developed countries.

Hovasse (pictured) anticipates the hardest hit regions will recover strongly, with advances in vaccination campaigns being a natural catalyst. In its main Emerging markets He has added funds to Brazil and Russia since the beginning of the year.

“It will likely delay the outperformance of emerging market stocks.” [for] a couple of months, ”he said.

“I have no exact idea what will happen to the Indian variant.” We are watching it very closely. However, our basic thesis is that the call will work in a few months. “

Slower vaccine introductions

Anthony Willis, who works on the multi-manager team at BMO Global Asset Management, explained how developing countries are experiencing the worst outbreaks as the third wave flattens in Europe as their vaccination campaigns lag.

“The distribution of the P1 variant in Brazil and Latin America is known, but there has been a significant increase in the number of cases in other countries such as Turkey and especially in India. Similar to Brazil, India is witnessing the rapid spread of a new variant, and while vaccines may suppress it, the vaccine adoption has not progressed far enough to make a big difference, “he said.

India broke the US record for daily reported new cases last week and has consistently reached new milestones since then. The daily counts this week are well over 300,000. Given the lack of oxygen in hospitals, the number of official Covid-19 deaths also topped 200,000 yesterday, although many believe the actual total is much larger.

Willis juxtaposed the situation in Europe and the United States, “where the feed into hospitalizations and deaths from vaccinating the most vulnerable were lower”. He added that it shows that the virus will continue to hamper the recovery of the global economy, especially regions that are more reliant on the return of travel and tourism.

Raw material boom helps

Asset management giant BlackRock sees the macro picture improving and fears rising inflation in the US as bond yields stabilize and expectations of an imminent rate hike slump.

Anna Stupnytska, global macroeconomist at Fidelity International, said, “When inflation and growth are higher in the US, it tends to kick out and is an incentive for emerging markets.”

The key is that inflation is kept in check, and it points to “relatively weak” inflation in China that was “first in and first out” of the pandemic, suggesting that consumer demand “is not there yet.” “and should help keep a lid on inflation as uncertainties remain.

Stupnytska added that strong US growth will continue to drive energy prices and BlackRock notes higher booming raw material prices will help regions like Latin America that are net exporters of natural resources.

The company’s BlackRock Investment Institute took an optimistic stance last week, forecasting emerging markets would overcome the Covid revival: “We expect their economic restart to be likely to be delayed – but not derailed. We are overall positive on broad emerging markets and stocks out of Asia ex Japan for the next six to 12 months and expect these assets to be well positioned to benefit from a vaccine-driven global restart. “

They added, “We are also seeing room for emerging market currencies – especially commodity exporters – to move forward as these currencies do not yet fully reflect the commodity rally.”

The asset manager’s strategists argued that the economic restart would continue to support prices for commodities like copper. That would be an addition to Brazil and the Brazilian real, which has lost nearly a third of its pre-pandemic value against the pound.

Do not write off Alibaba

Chetan Sehgal (Picture), lead manager of Templeton Emerging Markets ((TEM) Investment Trust looks like Brazil. After the central bank hiked interest rates from record lows in March to fight domestic inflation, he believes market-leading banks are well positioned in a rising interest rate environment.

He’s also optimistic about the long-term outlook for Chinese internet stocks, which have also struggled under tighter government controls more recently, as Alibaba and its chief executive Jack Ma have so far been in the line of fire.

The e-commerce giant and Tencent are front runners in many emerging market funds, including the Franklin Templeton Trust, where they were accounting for about 9% apiece at the end of February. Sehgal said he thinks crackdown fears are exaggerated given the strength of the companies’ franchises.

“While regulatory news could increase short-term volatility in its stock price, despite increasing competition, we remain broadly confident on the longer-term fundamentals of several leading internet companies,” he said.

“We also believe that regulators are interested in ensuring the sustainable development of the Internet space for all concerned, rather than containing its growth.”

The manager added that the global competitiveness of companies in these regions continues to show through. He cited a widespread chip shortage that underscores the global reliance on Taiwanese and South Korean semiconductor companies that dominate the market.

The outperformance forecasts for emerging markets are based in part on the idea of ​​catching up after falling behind since the financial crisis, a situation that continues at the index level.

Over the past 10 years, the MSCI World Index is up 211%, triple the 71% for emerging markets. Bulls believe this leaves plenty of headroom for longer run for stocks to do.

Covid variants delay, do not derail the rally in emerging markets



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