Navigating Emerging Markets During Uncertain Times: This Too Shall Pass

Even though economic activity in many countries has dramatically slowed or stopped due to the coronavirus outbreak, Franklin Templeton Emerging Markets Equity’s Andrew Ness still thinks there’s underlying long-term potential in emerging markets. He shares the specifics of what he’s on the lookout for as an investor in this highly uncertain period—which eventually will pass.

In recent weeks, economic activity across emerging markets has come to a halt, currencies have weakened and equity markets have fallen as coronavirus has swept across the globe. While this situation is rather unique, it isn’t the first time in my career a crisis has hit. Our emerging markets team has decades of experience investing through highly volatile periods; this has helped us remain calm in the current crisis. There’s no panic within the team—we recognize that this period will pass and that things will recover.

Our team is not only well-resourced, but is locally based, with a presence in 16 countries and multiple time zones. We think that is a key competitive advantage. For example, it has certainly been helpful having a team on the ground in Hong Kong and Shanghai during this trying period to help us better understand what’s happening on the ground in China.

Since the coronavirus outbreak first became known, our teams in Hong Kong and China have held more than 500 meetings/calls with companies and industry specialists to gather insight into how it has been affecting business operations. The crisis clearly has hit markets across the globe and volatility remains high. Price swings have been dramatic; for example, we’ve seen 8 +/- 4% absolute moves in the MSCI Emerging Markets Index in the last two weeks of March.1 So effectively, we’re seeing indiscriminate moves in markets, and fundamental factors are having little impact on where stocks are trading.

We’ve seen weakness nearly across the board, with the sudden collapse in consumer activity negatively impacting consumer-facing names, such as sportswear brands, auto manufacturers and casino operators. The oil price plunge has also weighed on related sector stocks, and in general, banking stocks have likewise been weak amid slowing credit and loan growth.

However, we don’t think there will be systemic banking crises in emerging markets. Banks are generally well-capitalized, and regulators have overall been doing a good job supervising markets. We believe when this crisis passes, banking stocks should remain well positioned to resume growth, given the low levels of credit penetration across the asset class.