Asia & Emerging Markets update – what’s different in the developing world?

31 December 2019 was a landmark day for populations across the globe. Not only did it herald the start of a new decade, it was the first the World Health Organisation's China office heard reports of a new virus in Wuhan, a city in Eastern China.

Now known as coronavirus, what started as an epidemic mainly limited to China has now been detected across more than 150 countries worldwide. While China maintains the highest number of cases, these have fallen more recently, with the epicentre of the outbreak now in Europe.

In fact, lots of eastern economies have been on a different trajectory to the rest of the world. The growth in cases has been a lot slower in areas like Hong Kong and Singapore, which could be thanks to rapid and strict measures including tighter quarantine rules. The spread in South Korea has also slowed dramatically from its initial pace.

This article isn’t personal advice. If you’re not sure if an investment is right for you please ask for advice. Past performance isn’t a guide to what will happen in the future and all investments can fall as well as rise in value, so you could get back less than you invest. Unless otherwise stated all data is correct to 19 March.

Economic impact

There’s still a lot of uncertainty around Covid-19 and its potential impact globally. We shouldn’t rule out the possibility things could get worse before they get better. That said, Asian and emerging countries seem to have learnt lessons from more recent threats, and have arguably handled things better this time.

The most prominent coronavirus outbreak before this one was SARS (Severe Acute Respiratory Syndrome), which hit its peak in 2003. The number of people infected with Covid-19 has well surpassed those hit with SARS, but the experience means some Asian countries have been better prepared to deal with the coronavirus as it emerged.

Taiwan is a case in point. Despite its proximity to China, cases of Covid-19 have been contained remarkably well. SARS had a much heavier impact on Taiwan, so this time around the country has taken quick and decisive action. Early travel restrictions, aggressive testing and screening of contacts, strict quarantine rules, universal healthcare, and proactive communication to get the population on board have helped.

Previous economic crises were also different to what we're going through now. During the 1997 Asian financial crisis and 2008 global financial crisis, for example, a lot of companies suffered because they carried such high levels of debt and little cash. This makes it much harder to survive the tough times. But today, there are fewer highly-indebted companies, and lots have stronger balance sheets to hopefully help see them through.

The issue now is that the crisis is linked to people's health, and doesn't stem directly from the financial system. This has instilled fear and panic, which inevitably has an impact on the way we go about our daily lives, and the action investors take. It means the recent stock market falls have been indiscriminate – investors have been selling shares of companies across all sectors, paying little attention to longer-term fundamentals.

It also means the impact on economies and businesses could be significant, at least in the short term. Businesses across the region have shut down, or have had to come up with other ways of working.

So far, China has borne the brunt of the epidemic. Parts of the country are still in lockdown and business activities in some cities have ground to a complete halt. But some Chinese factories have restarted production, even if they're only operating at half the normal rate.

More broadly across Asia, the main areas reporting a dramatic slowdown are airlines, hotels, taxis, restaurants and retail. Tourism’s hurting, and lots of businesses are suffering from a slowdown in consumer spending. In China, retail sales fell by 20.5% in January and February from a year earlier. China’s industrial output also contracted at the fastest pace on record in the first two months of this year, while urban unemployment hit its highest rate ever in February.

Overall, China is a much bigger and a more integrated part of the global economy than it once was. Its contribution to global GDP is around 16% (four times the size it was during the SARS outbreak). It’s a huge global player.

While the focus until now has been on China and Asia, there are growing cases of Covid-19 in the Middle East, Africa and parts of Latin America. It’s likely we'll see some disruption in these regions as well, though it's too early to gauge exactly what the impact will be on these economies.

Overall, Asian and emerging economies have the spread of the infection under control to a greater degree than some Western countries. But their links to the rest of the world, and the scale of China's influence on its neighbours, means the economic impact could linger for some time yet.

What action has been taken to help?

So far, China's central bank has resisted any large-scale package to stimulate its economy. Instead it's made more modest policy moves. These include a reduction in employers' social insurance payments, lower electricity fees, and VAT waivers. China’s aviation regulator also announced a subsidy for domestic and international carriers at the start of March. Its central bank might eventually come under pressure to take more drastic measures if the economy looks like it’s struggling.

Elsewhere, South Korea announced its own stimulus package this month, which is expected to channel money straight to its health system, child care and outdoor markets.

Australia, part of the broader Asia Pacific region, has been pumping money into its financial system in an attempt to prop up its economy. The Reserve Bank of Australia (RBA) has already bought huge swathes of government bonds (typically known as 'QE', or quantitative easing) and cut interest rates to a record low of 0.5%. The RBA has also signalled it's prepared to do more to support employment and economic activity, especially given the impact so far on travel and consumer spending.

Market impact

Markets hate uncertainty, so it's little surprise investor sentiment and stock prices have fallen across the globe. As I write, the FTSE World Index has fallen 18.8% so far this year.

In an environment where investors shy away from risk, Asian and emerging stock markets typically fare worse – they’re considered higher risk. This is partly because less-developed economies are often more susceptible to economic and political shocks, and in some respects are behind the curve compared with more well-established parts of the world.

The FTSE Emerging Index has fallen 21.1%, while the FTSE Asia Pacific ex Japan Index has lost 19.6% so far this year. But some individual markets have actually proven to be some of the most resilient.

Even though China is where the outbreak began, it comes out on top as one of the world's best performing major markets, with a smaller loss of 7.2%. While its market fell sharply at the peak of the outbreak towards the end of January, it subsequently rebounded quicker than most others. Global markets have fallen back again since the end of February, but China hasn't suffered as big a setback.

This is partly because China’s been more successful in stemming the outbreak, and its economy could therefore recover sooner. Some commentators expect a recovery as soon as the second half of this year, and it's possible company earnings may even get back to normal levels by 2021.

On the other hand, some European countries have been much slower to respond, and their stock markets haven't taken too kindly.

Stock markets are likely to remain sensitive to daily news flows about the virus. With some of the positive containment news in the east we could see some recovery in Asia later this year, ahead of any stock market rally in western countries.

But even if that's the case, we think investors will want to see more confidence that we're approaching a peak in virus cases globally, or that we see a much more coordinated intervention by major global governments and central banks to support demand and economic activity.

What should matter the most to investors is the long-term outlook for the companies they invest in. Asia and emerging markets are still home to some exciting trends that are expected to develop over the coming years, regardless of setbacks along the way although there aren’t any guarantees.

Most developing economies have already gone through a period of industrialisation, and now rising wealth could help towards the next stage of growth. These markets are also supported by young populations, keen to work hard and catch up with consumers in the west. This could ultimately help companies across a variety of sectors, including technology, retail and financial services.

What should investors consider?

It’s never nice to see the value of your investments go down, especially as sharply as this. While the scale of these falls hasn’t been seen in over 30 years, investors should remember investing in the stock-market is never a sure thing. There’s always a chance you could get back less than you invest, and there will almost certainly be volatility along the way.

That’s why we think, if you’re comfortable investing in the stock market, you should make sure your investment portfolio matches your attitude to risk. If you’ve found recent volatility too much to bear, you could consider diversifying into other asset classes that aren’t usually as volatile or have tended to perform differently to the stock market over time, such as bonds, property or gold.

You should also make sure you’ve got plenty of diversification, so you’re never risking too much on a particular area or investment style. Investing in things that perform differently in different market conditions means not everything in your portfolio will do well at the same time, but could provide more balance to your returns.

Some investors might be tempted to sell everything to avoid further losses and wait for the markets to recover before investing again. In practice though this is very difficult to do, and could result in worse returns than if you’d stayed invested. There’s no signal when we reach the bottom of the market. They can recover quickly, meaning you could miss out on the gains of a potential market rally.

Whatever you decide to do, we think taking a long-term view is the most important thing. There’ve been market crashes throughout history – many worse than this one has so far been. Over time the market has recovered though.

Of course there are no guarantees and there’s no telling when or how long a recovery will take. It could be weeks, months or years and it could fall further. By staying invested for the long-term, you’re more likely to improve your returns over time. It should also help you see through whatever the future holds in store.

Wealth 50 funds

We have a range of Asian and emerging markets funds on the Wealth 50. Funds fully invested in the stock market are unlikely to escape big market falls, but each one takes a different approach. This means they'll perform differently in different market conditions, and take different action depending on market movements. These should be held as part of a diversified portfolio and they won’t be suitable for all investors. You should consider your own objectives and portfolio when choosing where to invest.

Here we consider the views of some of our preferred Asian and emerging markets fund managers, and how their funds have performed throughout the recent volatility. These funds invest in emerging markets, which are higher risk than developed markets. For more information, please refer to the Key Investor Information for each fund.

ASI Asia Pacific Equity

Slowing global growth, supply chain disruption and subdued domestic consumption could all contribute to lower company earnings over the coming months, according to the Asian equities team at Aberdeen Standard.

The team says lots of companies in the Asia Pacific region have already given cautious guidance in their outlook for earnings, though some sectors have been more resilient than others. For example, Chinese and Indian IT companies have still been doing quite well. Overall though, the team maintains a cautious outlook.

Historically the fund has held up a bit better when stock markets fall, and we've seen this so far this year. A focus on companies with strong balances sheets, a clear competitive edge, and healthy cash flows has helped here.

As long-term investors, the team doesn’t want to make any knee-jerk reactions while markets are so volatile. Instead, they've used the market setback as a chance to invest in companies at lower prices. They've recently added to some of the fund's existing investments in Chinese companies, as well as to those in the semiconductor industry.

The team’s confident about the longer-term trends and opportunities that will shape Asia's growth. The rise in consumption and demand for premium products, the development of new technologies, and the need for more and better infrastructure are all things to be positive about. They continue to invest in companies they think will benefit.

Past performance is not a guide to the future. Source: Lipper IM to 28/02/2020

Find out more about ASI Asia Pacific Equity including charges

ASI Asia Pacific Equity Key Investor Information

ASI Latin American Equity

Latin American stock markets have been some of the worst hit this year, falling 42.4%. Not only is Covid-19 having an impact on the region's economies like the rest of the world but, as a huge commodity exporter, the region has been hurt by the recent oil price falls and turbulence in commodity markets.

The fund has done slightly worse, losing 44.2% so far this year. Investments in Mexico and Brazil have been the main driver of underperformance, including restaurant owner BK Brasil, Mexican hotel developer and operator Hoteles City, Brazilian car rental company Localiza, and Mexican airport operators.

The fund's management team are looking at each company in the fund to determine if any setbacks are temporary, or if the longer-term outlook has changed. Overall they continue to focus on companies with strong balance sheets, which are run by experienced management teams and have been able to survive volatile environments before.

In the near term, the team thinks sectors like tourism and retail will be most affected. For example, the temporary closure of malls and public spaces will provide challenges for shops and malls. On the other hand e-commerce, technology and telecoms businesses could benefit as people find new ways to shop and communicate.

The team hasn't made wholesale changes to the fund just yet, but are taking this as a chance to add to favoured holdings at more attractive share prices. They'll continue to keep an eye out for new opportunities if the market volatility persists.

Past performance is not a guide to the future. Source: Lipper IM to 28/02/2020

Find out more about ASI Latin American Equity including charges

ASI Latin American Equity Key Investor Information

First State Asia Focus

Martin Lau and the Asian equities team have always taken a conservative approach to investing.

The team thinks action taken in China and Singapore has been highly effective in stemming the outbreak. But ultimately the global economic fallout could still be significant, and falling consumer demand is likely to impact a variety of companies and sectors.

As a result the team continues to focus on businesses they think can hold up in the tough times, and drive profit growth over the long term. They should be in good financial health, own strong franchises, and be run by robust management teams.

This more conservative approach has historically seen the fund hold up relatively well in weaker markets, which is what's happened so far this year, with the fund falling 14.9%. While losses are difficult for any investor, by falling less than the broader market it should put the fund on the front foot once markets start to rise again. And over the longer term Lau and his team have built an impressive track record, despite the recent setback. As always, past performance isn't a guide to future returns.

So far this year, healthcare companies including CSL, Resmed and Fisher & Paykel have all held up well. Some consumer companies have faltered over the short term, but over the long run businesses like Nestle and Hindustan Unilever could benefit from domestic spending.

The current negative sentiment could be a good opportunity to invest in quality companies at lower prices. That said, the team is mindful there could be more volatility to come, so for now they're drip feeding money back into the market, rather than starting big positions in one fell swoop.

*Where N/A is shown, no performance data is available for this period.

Past performance is not a guide to the future. Source: Lipper IM to 28/02/2020

Find out more about First State Asia Focus including charges

First State Asia Focus Key Investor Information

JPM Emerging Markets

The JPMorgan Emerging Markets Fund has held up better than the broader emerging stock market so far this year. Leon Eidelman and Austin Forey, the fund's managers, have avoided the energy sector and Russian companies, which have both been hurt by the recent oil price falls, so this helped performance. A large part of the fund is also invested in China, one of the stronger-performing markets this year, which has also helped.

In the near term, the managers are mindful that companies related to consumer and travel spending could see their earnings come under pressure. On the other hand, companies that provide online entertainment and gaming are less likely to be impacted by recent events, and could even benefit as people look for alternative sources of entertainment.

While markets are likely to remain volatile in the short term, the managers continue to focus on quality companies with sustainable competitive advantages, consistent cash flows and strong management teams, which they think could hold up well in the current environment. They think it's more important than ever to take a long-term view to identify strong businesses that will eventually emerge from these challenging times even stronger than their competitors.

Past performance is not a guide to the future. Source: Lipper IM to 28/02/2020

Find out more about JPM Emerging Markets including charges

JPM Emerging Markets Key Investor Information

Jupiter Asian Income

Like most fund managers in the sector, Jason Pidcock expects to see more market volatility, and company earnings take a hit in the short term. He continues to focus on companies he believes can survive periods of crisis like this, which are typically supported by strong balance sheets and prudent management teams.

The fund has underperformed the FTSE Asia Pacific ex Japan Index so far this year. The fund doesn’t invest as much in China as the index, so that's impacted performance given China has held up better. In the past, the fund has proven more resilient in weaker markets, given its focus on highly cash-generative, quality companies. We expect the fund to perform this way over longer periods, though there are no guarantees and past performance isn't a guide to future returns.

Pidcock expects the crisis to be a one-year event. At the moment, markets and economies are seeing falls in a variety of factors, from asset prices, confidence and interest rates, to travel and pollution. And this will inevitably have an impact on economies globally.

Lower earnings mean some companies are likely to cut dividends this year, which could impact the income paid by the fund. That said, the manager thinks most Asian countries will return to higher-rates of growth next year and, as things currently stand, this could mean the level of income paid next year could also be higher. As always, income is variable and not guaranteed.

This fund is relatively concentrated with about 30 investments. This increases performance potential but adds risk. It also takes charges from capital which can increase the yield at the cost of capital gain.

*Where N/A is shown, no performance data is available for this period.

Past performance is not a guide to the future. Source: Lipper IM to 28/02/2020

Find out more about Jupiter Asian Income including charges

Jupiter Asian Income Key Investor Information

Jupiter India

India has so far proven relatively resilient amid the outbreak. Schools and malls have been shut down in certain states, and India is also self-isolating itself as a country. This includes banning passengers from Europe and the UK from entering the country.

Aside from the virus, India's growth has slowed over the past year, though it's still one of the world's fastest-growing economies. This is helped by a recent price slump in oil, which is a key import for India. The Reserve Bank of India hasn't had to take any significant policy action to stimulate the economy just yet, but they have tools at their disposal and there is room for interest rate cuts from current levels.

India's consumer staples and healthcare sectors have held up relatively well amid the recent turmoil. Jupiter India is biased to both these areas, which has helped recent performance. On the other hand, lower oil prices has hurt the energy sector and investments in companies such as Hindustan Petroleum have been punished as a result. Fund manager Avinash Vazirani maintains his conviction in the business, and thinks it still has excellent long-term growth prospects.

The manager is currently reassessing some companies in the fund, particularly those in the consumer discretionary and industrials sectors. That said, he hasn't yet made any significant changes to the fund, as the shutdowns in India might not be long term.

Company earnings are likely to be impacted over the coming months, though they were fairly positive during the first couple of months of 2020. Vazirani says he'll closely monitor developments in India and is prepared to take action if anything changes drastically. But at the moment he's encouraged by the government’s quick action in isolating the country and dealing with the existing cases.

Past performance is not a guide to the future. Source: Lipper IM to 28/02/2020

Find out more about Jupiter India including charges

Jupiter India Key Investor Information

Schroder Small Cap Discovery

Matthew Dobbs is keeping calm and cautious in the current environment. He continues to focus on companies run by robust management teams, which he thinks are strong enough to navigate challenging environments and ride out the downturn.

This fund has a bias towards small and medium-sized companies that are based in Asian and emerging markets, or are based elsewhere but make most of their profits from these regions. Smaller businesses don't tend to hold up as well as bigger and more stable firms when market conditions are weaker. That's been the case so far this year, which has held back the fund's performance. We still think smaller companies offer significant long-term growth potential, but they're higher-risk and more volatile, especially over shorter periods.

Dobbs is looking to take advantage of stock market falls by investing in shares at cheaper prices. He's being selective though and isn't jumping in feet first. There could be more volatility to come, so he thinks it makes sense to take a considered approach to adding to favoured companies periodically.

Looking forwards, Dobbs thinks the impact on economic activity in the region will gradually fade as we approach summer, with scope for a healthy rebound in the second half of the year and into 2021. Company earnings in lots of sectors could be weaker in the short term, but this could gradually subside into next year – provided the broader global economy can also follow a similar recovery path.

Past performance is not a guide to the future. Source: Lipper IM to 28/02/2020

Find out more about Schroder Small Cap Discovery including charges

Schroder Small Cap Discovery Key Investor Information

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