Emerging Markets Hit by Spread of Coronavirus in February

Our Emerging Markets Equity team examines the impact of the spread of coronavirus across emerging market economies during the month of February.

Three Things We’re Thinking About Today

  1. The Covid-19 coronavirus led the narrative in February, as a spike in new cases outside of China heightened global uncertainty. While new cases in China, Hong Kong and Singapore started to taper, the spread of Covid-19 across Europe and the United States saw financial markets in developed markets drop considerably late in the month. Expectations of weaker-than-expected global energy and metals demand growth (especially from China) also led commodity prices to decline in February. Although this will adversely impact net exporters such as Russia, net importers such as India stand to benefit, in our estimation. Chinese equity markets, however, were resilient in February, as the Chinese authorities’ aggressive steps to contain the spread of Covid-19 started to yield positive results. Supportive action from policymakers including monetary easing, fiscal measures and additional liquidity also helped ease investor concerns. While first-quarter 2020 economic growth is expected to be severely impacted, we could see growth in the short-term continue to be affected as a resumption in Chinese production, and demand may not necessarily translate into a full recovery in exports.
  2. South Korea saw a sharp rise in new cases of Covid-19 in February, taking its total to the highest globally outside of China. In addition to China, South Korea is a key supplier in the global supply chain. While large-scale production suspensions were not reported, some production lines were halted for safety reasons. Supply disruptions from China also had an impact. The tourism and retail sectors have, however, been more severely affected. In late February, the Bank of Korea disappointed investors by leaving its benchmark interest rate unchanged at 1.25%, choosing instead to undertake targeted support such as increasing the special lending facility for small companies that were impacted by the outbreak. High household debt levels and real estate inflation remained key concerns. Gross domestic product (GDP) growth estimates for 2020 were trimmed to 2.0% from 2.3% amid increased uncertainty resulting from the virus outbreak. The government is expected to announce a supplementary budget in March to help businesses impacted by the outbreak. We believe that there is significant pent-up demand, which could lead to a swift recovery once the virus has been contained.
  3. Thailand was one of the weakest markets in February as Covid-19 and a rise in political uncertainty compounded impact from the country’s worst drought in 40 years, along with budget delays. The government cut its 2020 GDP growth forecast to 1.5-2.5% from 2.7-3.7% as a decline in tourists (especially from China) impacted the tourist-reliant economy, and a strong baht weighed on exports. In addition to new investment measures and tax benefits, the government announced plans to introduce an economic stimulus package covering tourism, consumption and investment in the near term. The Bank of Thailand also cut its benchmark interest rate to a record low of 1.0% in February amid efforts to stimulate the domestic economy. Over the longer term, we are of the opinion that key beneficiaries of Thailand’s economic recovery include exporters, including tourism exports (e.g. airports and hotels) and health care exports (e.g. hospitals a large exposure to medical tourism) as well as consumer staples (e.g. convenience store operators, retailers). Major domestic banks also appear attractively valued to us.