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Asian & Emerging Markets review – what's the coronavirus impact?

In this Asia and emerging markets sector review, we look at how the coronavirus crisis has impacted their economies, how funds have coped, and share our outlook for the future.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The coronavirus crisis has brought unprecedented challenges to economies around the world, and volatility to global stock markets. Asian and emerging markets are no exception.

But it's been a mixed bag. After all, this part of the world is large and diverse. Each country has been hit with the virus at different times, meaning each one is at a different stage of its own crisis and subsequent recovery. These economies are also developing at a different pace from one another, so this will have an impact on how well they fare too.

In this Asia and emerging markets sector review, we look at what's happened in these economies so far in 2020, and share our outlook for the future. We also take a closer look at how funds in these sectors, including our Wealth Shortlist picks, have performed.

This article isn’t personal advice. If you're not sure if an investment is right for you, please contact us about advice. Investments will rise and fall in value, so you could get back less than you invest.

How has the region handled the crisis?

China was the first economy going into the coronavirus pandemic, and the first to experience some sort of recovery. It's therefore an essential case study for other economies hit by the virus.

In January, Hubei's capital of Wuhan, where the virus emerged, was the first to enter lockdown. Wuhan is an important hub in central China, financially, economically, socially and culturally, and with a population of 11m, its lockdown was bound to cause disruption. But strict quarantine measures appeared to be a success and by early March reported virus cases dropped to less than 100 nationally per day.

China's economic output has still been damaged though, and growth contracted earlier in the year. Like most global central banks, China brought in measures to help stimulate the economy. It's since seen an economic rebound, and growth forecasts are expected to recover further over the coming year. But, it isn't firing on all cylinders just yet, and some areas are likely to come back slower than others.

There's no doubt China, as well as other Asian nations, have learnt important lessons from previous pandemics. Other countries like Taiwan have also proved relatively resilient. It had the highest mortality rate in the world during the SARS outbreak. So this time around it took swifter action and has seen a low infection rate compared with other economies.

Latin American economies haven't fared quite so well and are now at the epicentre of the crisis. Coronavirus has spread to every country in the region and, at the time of writing, more than 5.4m cases have been recorded. More than 210,000 people have sadly died.

Several Latin American nations have been criticised for their mishandling of the crisis. Populist presidents in Brazil and Mexico, for example, have downplayed the seriousness of the virus. Some suggest this has contributed to the rising infection rate as they’ve taken less severe lockdown measures. As Latin America's two most populous regions, Brazil and Mexico have so far seen the highest number of deaths and, in turn, this has created a huge amount of uncertainty.

What's the impact on markets?

So far this year, to the end of July 2020, the FTSE Emerging Index has fallen 1.1% while the FTSE Asia Pacific ex Japan Index has made a small gain of 2.4%. Please remember past performance isn't a guide to future returns.

Share prices fell sharply in February and March, as the Covid-19 outbreak took hold and pushed investor sentiment into a downward spiral. Most stock markets have since recovered to some extent. Governments around the world have stepped in with large amounts of spending and tax break packages to support their country's economy. But the impact on markets varies from country to country, depending on the nature of the policies put in place and the rates of infection.

Impressively, and somewhat coincidentally, the Chinese and Taiwanese markets have both made gains of 15.4%* since the start of the year to the end of July 2020. Investor feelings towards these markets has been relatively robust, with China already making a recovery, and Taiwan doing well to stem the virus's spread.

Latin American markets have been some of the weakest. The stock market of the region's largest economy, Brazil, has lost 29.7%, while the broader Latin American market has fallen 28.1%. Higher infection rates and death tolls have created uncertainty for consumers and businesses alike. That’s weighed on stock market performance.

Eastern Europe makes up a small part of the wider emerging stock market, but it's been noticeably weak. Especially as Russia has some of the highest number of recorded coronavirus cases in the world. As a huge exporter of natural resources, a volatile oil price earlier in the year also hasn't helped Russia's case. Its stock market has fallen 23.5% so far this year.

Broadly speaking, the market is rewarding those countries or sectors that have handled the virus more efficiently, and shunning those that haven't. Remember that this performance is over a short time period.

Asian & emerging stock market performance

Past performance is not a guide to the future. Source: Lipper IM* to 31/07/2020.

What about companies?

Investors have tended to favour companies that provide convenient services, online shopping and education, entertainment, social media platforms, and ways of staying connected. It means the technology sector, as well as other consumer services businesses, have performed strongly so far this year.

Within technology and communication services, the market is dominated by a handful of large firms, including China's Alibaba and Tencent, South Korea's Samsung, and Taiwan Semiconductor Manufacturing. They've all contributed towards the market's return this year. If they continue to do well, funds with higher weightings to them will benefit, while those without will miss out. But the reverse is also true and these companies could experience setbacks too. If they don't meet the high expectations lots of investors currently place on them, their share prices could fall.

The healthcare sector, which is generally more defensive during periods of market turmoil and has benefited from strong demand for healthcare products throughout the crisis, has also performed well.

Other areas like financials haven't done so well. Global banks have been weaker this year as, alongside low interest rates, they’re expected to deal with loan losses following this crisis. Oil & gas companies have also been weak because of a volatile oil price and as many countries and companies have demanded less energy and other resources while in lockdown.

Emerging markets sector performance

Past performance is not a guide to the future. Source: Lipper IM to 31/07/2020.

What can investors expect?

Going forward, and in the near term, stock markets are likely to remain sensitive to daily news about the virus. Investors will likely want to see more confidence that different economies are approaching a peak in virus cases. Or that we continue to see backing from major global governments and central banks to support domestic demand and economic activity.

What should matter the most to investors is the long-term outlook for the companies they invest in. Asian and emerging markets are still home to some exciting trends that are expected to develop over the coming years – even with events like this along the way.

Rising wealth could help towards the next stage of growth, and these markets are also supported by hard working populations keen to catch up with consumers in the west. This could help companies across a number of sectors, including technology, retail and financial services.

How have Asian and emerging markets funds performed?

So far this year (up to 31 July 2020), the average fund in the IA Global Emerging Markets sector has fallen 3.6% while the average fund in the IA Asia Pacific ex Japan sector has grown 1.3%. This means the average fund in these sectors hasn't performed as well as the broader emerging and Asian stock markets. As always, past performance isn't a guide to future returns.

Broadly speaking we’ve found funds with a focus on companies capable of above-average growth (often measured in earnings or cash flow), otherwise known as 'growth' companies, did best. Especially those focused on some of the region's largest tech companies.

On the other hand, 'value' focused funds, or those that have less weighting to China or the tech sector, haven’t performed as well. So-called 'value' investors aim to uncover hidden gems – companies whose share prices don’t necessarily reflect their actual worth or earnings potential. These businesses might’ve fallen on hard times, but are often undergoing a turnaround that’s yet to be reflected in their share price.

In the Global Emerging Markets sector, our analysis shows the FP Carmignac Emerging Markets Fund has been the best-performing fund so far this year. A large part of the fund is invested in the communication services, consumer discretionary, and technology sectors, with large investments in companies such as Samsung, and Tencent. On the other hand it has less in weaker sectors like financials and materials companies.

The Allianz Total Return Asian Equity Fund performed best in the Asia Pacific ex Japan sector. Again, a focus on big tech names like Tencent and Alibaba boosted returns this year. But the manager's track record prior to this year is more subdued against its benchmark, and we favour managers with a more consistent track record.

Annual percentage growth
July 15 -
July 16
July 16 -
July 17
July 17 -
July 18
July 18 -
July 19
July 19 -
July 20
FP Carmignac Emerging Markets n/a n/a n/a n/a 24.2%
IA Global Emerging Markets 19.2% 24.1% 2.8% 7.7% -3.9%
Allianz Total Return Asian Equity 11.2% 24.6% -1.9% 7.7% 26.4%
IA Asia Pacific ex Japan 18.9% 22.8% 5.1% 7.6% -0.2%

Past performance is not a guide to the future. Source: Lipper IM to 31/07/2020.

n/a – full year performance data is not available

Research team activity

Our investment research team has continued to meet fund managers through video and conference calls since lockdown began. We recently spoke to First State's Martin Lau on two occasions, to discuss both his Asia Focus and Greater China Growth funds. We discussed sectors that have and haven't done well throughout the crisis, and the trends taking place in these markets.

Lau says there are currently two types of company – those that have benefited from the trends accelerated by the virus, including lots of tech businesses, and those that have been negatively affected, including the retail and tourism sectors. He sees it as his role to spot those that will ultimately emerge from the crisis stronger. Some companies, for example, have used this period as an opportunity to assess their costs and see how they can make long-term savings.

In terms of technology, Lau has invested in Tencent in some of his portfolios for many years. But in the past he's had concerns about corporate governance standards at other tech firms. After carrying out extensive analysis and due diligence, the manager is now more upbeat about governance standards. He thinks more of these businesses could benefit from the growing use of tech following the coronavirus outbreak. He used market volatility earlier in the year to add investments in both Alibaba and at attractive share prices in the China fund. Tencent is also already held in both the Asia and China funds.

How have our Wealth Shortlist funds performed?

Asian and emerging markets Wealth Shortlist funds have delivered mixed performance so far this year. We usually expect this though, as it's in line with how we select funds for the Shortlist. If all funds in a given sector are performing well at the same time, they're probably investing in similar areas. Those same areas won't perform well all the time, so it can be painful when they're out of favour. We prefer to take a diversified approach by investing with managers who have a variety of strengths, styles and areas of focus. Remember that past performance is not a guide the future, and performance stated here is over a short time period.

The best-performing fund so far this year was First State Greater China Growth. We expect this given the strength of the Chinese stock market. That said, the fund didn’t do as well as the average fund in the IA China / Greater China sector, due to lower weightings to large tech firms. The manager has an excellent long-term track record though. You can find out more about what we think about this fund in our latest update.

Schroder Asian Alpha Plus and JPM Emerging Markets were the next two best-performing funds, and they outperformed their respective peers in the Asia Pacific ex Japan and Global Emerging Markets sectors. In-keeping with the trends mentioned above, the funds' investments in higher-growth tech companies helped returns.

At the other end of the performance table was ASI Latin American Equity. Unsurprisingly this fund's fortunes are tied to those of the broader Latin American stock market, and this dampened performance. That said, it performed better than the market over this time, and over the longer-term too.

Our two Indian options, Stewart Investors Indian Subcontinent Sustainability and Jupiter India, have also been weaker this year. This is partly because the share prices of Indian companies generally haven't done as well as those based in other Asian and emerging markets. The managers of both funds have a lot of experience investing in India, and we think their funds have good long-term growth potential, but there are no guarantees.

Emerging markets could be an interesting place for investors prepared to accept the higher risks and ups and downs of investing in emerging markets. But we suggest a long-term view of at least 5-10 years should be taken.

Here’s how our Wealth Shortlist funds have done:

Annual percentage growth
July 15 -
July 16
July 16 -
July 17
July 17 -
July 18
July 18 -
July 19
July 19 -
July 20
ASI Asia Pacific Equity 10.9% 22.8% 3.6% 11.7% 0.7%
First State Asia Focus n/a 18.9% 11.7% 11.0% -0.9%
Jupiter Asian Income n/a 13.5% 2.7% 14.4% -7.2%
Schroder Asian Alpha Plus 18.7% 33.7% 8.7% 5.8% 5.6%
IA Asia Pacific ex Japan 18.9% 22.8% 5.1% 7.6% -0.2%
JPM Emerging Markets 23.1% 25.6% 4.3% 16.1% 5.3%
Schroder Small Cap Discovery 14.6% 15.3% -0.1% -0.9% -7.2%
IA Global Emerging Markets 19.3% 24.1% 2.8% 7.7% -3.9%
First State Greater China Growth 13.6% 27.0% 14.8% 11.9% 10.7%
IA China/Greater China 10.3% 33.7% 9.3% 5.3% 15.1%
Jupiter India 22.1% 20.0% -12.1% -10.5% -18.2%
Stewart Investors Indian Subcontinent Sustainability 16.7% 15.8% 9.1% 2.0% -11.8%
FTSE India 16.1% 24.2% 5.6% 0.9% -8.6%
ASI Latin American Equity 34.9% 22.2% -1.9% 21.1% -30.5%
FTSE Emerging Latin America 25.2% 18.6% 0.7% 17.9% -29.6%

Past performance is not a guide to the future. Source: Lipper IM to 31/07/2020.

n/a – full year performance data is not available

FP Carmignac Emerging Markets Key investor information

Allianz Total Return Asian Equity Key investor information

ASI Asia Pacific Equity Key investor information

First State Asia Focus Key investor information

Jupiter Asian Income Key investor information

Schroder Asian Alpha Plus Key investor information

JPM Emerging Markets Key investor information

Schroder Small Cap Discovery Key Investor Information

First State China Growth Key investor information

Jupiter India Key investor information

Stewart Investors Indian Subcontinent Sustainability Key investor information

ASI Latin American Equity Key investor information

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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