Which EM countries are best positioned to recover from the pandemic?

Although the Covid-19 crisis is far from over, some emerging markets are better positioned than others to recover.

“Countries at the higher end of the development scale — a lot of Southeast Asian economies — went into this crisis with significantly better balance sheets,” said Nishant Upadhyay, head of emerging markets debt with HSBC Global Asset Management in New York.

Places like China, Taiwan and South Korea had a “much better” ability to withstand the crisis, Upadhyay said, and “their ability to bounce back will be much better.”

Second-tier economies, like India and Indonesia, were in a tougher spot when it came to responding to the pandemic.

“They’re both very different economies, but they have some similarities to the extent that they’re large economies, very highly populated places with not nearly the same degree of availability of hospitals or health infrastructure,” Upadhyay said.

Upadhyay predicted these countries would have a stronger downturn, but also a stronger bounce back. India, he noted, “has the benefit of having an economy that, for the most part, is more domestically driven. That also shields you a little bit from the downside to global growth.”

When it comes to global trade, there’s speculation that the virus may cause countries — particularly the U.S. — to rethink their supply chains, which could hurt Chinese exports.

“Regardless of a global backlash, or a continued trade war with the U.S., many production facilities will likely migrate from China to countries with lower labour costs,” wrote Jeff Feng, head of emerging market equities with Invesco Ltd. in Hong Kong, in a blog post.

“We believe the virus and trade war are catalysts to accelerate this shift, one that will be incredibly important to consider when investing in Chinese stocks,” Feng wrote.

Feng, who manages the Invesco Emerging Markets Class Fund, added that none of the Chinese stocks he owns is reliant on cheap labour. In an interview, he indicated that China’s domestic market could act as a buffer against a potential global backlash.

“China has a very big domestic market,” Feng said. “It doesn’t rely on exporting as heavily as countries like Vietnam.”

Some have argued that countries like the U.S. may look to reshore manufacturing in the wake of the pandemic, but Upadhyay had his doubts about that.

“I find it hard to believe that a bulk of manufacturing can be reshored, just given the underlying competitive advantage that a lot of [emerging] economies have on the labour front, whether it’s the cost of labour or the availability of skilled labour,” Upadhyay said.

One country Upadhyay said he’s worried about is Brazil, which went into Covid-19 with a “fairly precarious fiscal outlook,” made worse by the government’s failure to mount an adequate response to the pandemic.

Feng said Brazil is “basically a poster boy for not doing things properly.”

Turkey, on the other hand, is a country that has handled the crisis “extremely well,” Upadhyay said. He cautioned that Turkey “continues to be vulnerable,” but said its economic activity “can probably surprise to the upside.”

“Turkey had invested in advance in building up hospitals and health care, which allowed them to keep the economy open and have targeted lockdowns and targeted isolation for those at risk, rather than have the economy brought to a grinding halt,” Upadhyay said.

A buying opportunity

Stock markets around the world tanked in March. For Feng, the market volatility presented a buying opportunity.

“Certain companies and industries were dumped by investors indiscriminately,” Feng said of the market selloff. “You had people who were either very panicked, or people who had to sell because they needed to raise cash.”

Feng took advantage of the volatility by acquiring shares of a Mexican airport operator. Although the travel industry is taking a beating right now, Feng is confident it will recover — “particularly if you serve vacationers.”

Feng also added a Latin American fast-food operator to his portfolio during the downturn.

“A lot of their stores are a standalone format,” Feng said. “This means when most shopping malls are closed, this company can still have more than half of their stores open for business.”

The March meltdown allowed Upadhyay to acquire emerging market debt at attractive valuations, as well.

“We fairly aggressively bought risks that we liked, which had sold off almost as much as the risks we did not like,” Upadhyay said. “So far, things have worked out fairly well. The risk premiums have come in.”

In response to Covid-19 — and, in many cases, before the pandemic began — central banks around the world have slashed interest rates. The current low-rate environment, Feng predicted, will make emerging markets an attractive investment opportunity for the foreseeable future.

“For people who want to grow their savings and keep the purchasing power of their savings, you need to look for growth,” Feng said. “Emerging markets, by their nature, grow faster than developed countries.”