by Nick Britton
Nick Britton
So, how are you bearing up? From talking to family, friends and colleagues, it seems that many have reached a turning point in the past couple of weeks.
The novelty of the lockdown has well and truly worn off. What felt surreal at first now feels humdrum – less 28 Days Later, more Groundhog Day. Feelings of frustration, ennui or even depression have started creeping in, even among those like me who are fortunate enough to be healthy, safe and financially secure.
Since my daily life must now be lived within a one-mile radius of my home, it was a real pleasure this week to take a trip to more far-flung regions. Don’t worry, I haven’t been jetting off anywhere – my travel was purely virtual, courtesy of an AIC press call with three emerging markets managers.
I have always been fascinated by emerging markets – I spent three colourful years of my life living in one of them (China) and have always believed in the long-term investment case. I’m sure it is partly this emotional attachment that has led me to tilt my personal portfolio in the direction of faster-growing regions, though it hasn’t always been a decision that has enhanced my returns. In the current crisis, for example, emerging markets endured both a more devastating hit in March, and a feebler recovery in April (see chart).
Source: AIC/Morningstar (share price total return)
If I was wavering in my faith, however, it was restored by listening to Andrew Ness, Mario Solari and Ross Teverson, the respective managers or co-managers of Templeton Emerging Markets, Genesis Emerging Markets and Jupiter Emerging and Frontier Income.
Andrew began his emerging markets career during the ‘tequila crisis’ of 1994, but he admitted he had never experienced anything like the current pandemic. While he believes it’s “extremely premature to talk about any shape of recovery – V, U, W or any of the alphabet soup” he doesn’t think we’re in the cusp of a major depression either, with global stimulus measures going way beyond what we saw in the financial crisis.
All of the managers agreed that the responses of many emerging countries to the pandemic were encouraging, with Mario stating that “of the countries coping well with COVID, a large proportion are in emerging markets”. Andrew pointed to China and Northern Asian countries being better prepared for the crisis than even some developed nations.
Ross has seen pressure on some companies to cut dividends, including in the banking sector, but added that many in his portfolio are continuing to pay them and some will even be increasing them. “The dividend picture is better than people might expect,” he argued, pointing out that emerging market companies generally have lower leverage as well as strong underlying growth drivers supporting income payments.
Then there is the question of valuations. According to Andrew, valuations of emerging market equities represent a 35% discount to developed market valuations – there always is a discount, but this is unusually high by historical standards. It is worth adding that investment company investors can capture additional value, with the AIC Global Emerging Markets sector now standing at a 12% discount to NAV compared to 1% for the Global sector.
None of this makes emerging markets a one-way bet. I received through the post today an emergency appeal from a charity I support, pointing out that the impact of COVID-19 on poorer regions of the world could be catastrophic. While some of these are not what we would class as ‘emerging’ or even ‘frontier’ markets, coronavirus could cause humanitarian crises with significant spillover effects.
Despite these alarming prospects, I am still happy with my portfolio’s exposure to emerging and frontier markets. Demographics are about the closest we get to certainty in the investment world, and these strongly favour developing regions, providing a favourable backdrop for many dominant and innovative companies. So I’m with Andrew, Mario and Ross (and Ian Cowie) in their belief that emerging markets will bounce back, though I have no idea when.
The COVID pandemic has been devastating for swathes of businesses, but at the AIC we have been investigating two sectors that are booming: food delivery and gaming. Both have benefitted from the increased time we are spending sitting on our bums at home. We have commentary from investment companies including Scottish Mortgage, Allianz Technology, Lindsell Train and Standard Life UK Smaller Companies.
We have been making progress in preparing a programme of AIC webinars, and will be emailing you shortly with dates for these. If you aren’t signed up to receive emails about training, or aren’t sure whether you are, you can make sure you receive this by dropping an email to Debra Gibbons.
Till next time, best of luck enduring your own personal Groundhog Days.
Nick Britton, Head of Intermediary Communications, AIC