Emerging Markets Outpace Developed Markets in July

Some emerging markets have been coping with the COVID-19 crisis better than others, and their economies are in different stages of recovery. Our emerging markets equity team highlights a few—and offers thoughts on why the pandemic has accelerated some existing fundamental and technological trends.

Three Things We’re Thinking About Today

  1. A collapse in economic activity amid the COVID-19 pandemic and expectations of slowing loan growth, falling margins and rising bad debts have hurt near-term earnings forecasts for Brazilian financials. While the pandemic has weighed on their businesses in the short term, we see a low probability of a systemic banking crisis in Brazil. The pandemic could, in fact, have the unintended effect of boosting bank penetration in Brazil. The government’s disbursement of emergency handouts through banks has compelled scores of previously “unbanked” individuals to open accounts. This group of new customers could drive a fresh wave of demand for financial services in the future. When the outbreak eventually passes, we expect quality banks to resume secular growth. Credit penetration in Brazil is far below many other markets, signaling room to head higher in the coming years. Brazil’s central bank has also cut its policy interest rate to a record low, which reduces the cost of renegotiating or restructuring loans, and could be a catalyst for longer-term credit growth. Our longer-term conviction remains bullish for select Brazilian banks where we see strong fundamentals, improving competitive positions and potential to benefit from structural growth drivers.
  1. A rally in technology stocks and effective control of COVID-19 in the country drove Taiwan’s equity benchmark to an all-time high in July. Known for its research and development strength, Taiwan’s semiconductor industry is a global leader, with the island home to one of the world’s largest independent integrated chip manufacturers. The industry has been benefiting from increased demand from cloud applications related to remote working and online education, trends which the pandemic has accelerated. We believe the global outlook for memory chips will remain strong, driven by demand for memory solutions from smartphones, high-performance computing, 5G (fifth-generation wireless technology), artificial intelligence, internet of things, data centers and cloud infrastructure. The announcement by a major American competitor of a delay in the production of its next-generation chips and the possibility of outsourcing further bodes well for Taiwan’s semiconductor industry. Taiwan’s manufacturers are also at the forefront of the global push to move supply chains out of China, as rising tensions between the United States and China fuel demand for servers and chips not made on the mainland. The coronavirus pandemic is only expected to accelerate the shift to Taiwan, as more companies domestically and globally begin to re-evaluate China-dependent supply chains.
  1. South Korea embodies much of emerging markets’ new realities; namely institutional resilience, improved economic diversification and the emergence of world-leading emerging market (EM) companies. In addition to standing out as illustrative of the aforementioned factors, South Korea is also an example in terms of its handling of the COVID-19 pandemic. As a major oil importer, South Korea has disproportionately benefited from lower oil prices, while also seeing little economic impact from the collapse in international travel due to its lower dependency on tourism. An export powerhouse, a number of South Korean exporters are of global importance, supplying hardware that enables the modern economy to function. World-leading semiconductor and battery makers are benefiting from the secular trends of increased computing power and greener mobility—some of which are accelerating due to the pandemic. South Korea’s advantages in innovation and intellectual property are also evident in the health care sector—ranging from virus test kits to biologics—which have undoubtedly been supportive during this crisis. The country’s internet sector has also been thriving amid social distancing.