Asia: a beacon of emerging-market stability?

Investors pulled a record-breaking $83.3bn out of emerging-market stocks and bonds in March, says Dion Rabouin for Axios. That tops similar outflows seen during the global financial crisis or the 2014 “taper tantrum”. There are growing fears that mass bond defaults in the world’s emerging economies are only a matter of weeks away. 

The MSCI Emerging Markets index lost almost 24% in the first quarter. Emerging market equities now trade on a 65% discount to US equities, the largest ever, says William Watts for MarketWatch. 

That will draw the attention of bargain hunters, but the steep discount is warranted. In addition to fears about sovereign bond distress, many emerging economies will be hit hard by slumping commodity prices. Alarmingly “underdeveloped healthcare systems” are another concern.

Look east

Yet emerging Asian markets look poised to ride out the turbulence better than peers in Latin America and elsewhere. The MSCI Emerging Markets Asia index fell 18% in the first quarter in dollar terms, outperforming the 21.4% fall across all global markets. Mainland Chinese shares comprise about half of the MSCI Emerging Asia index, with the other half made up of shares in Taiwan, India, Thailand and other countries. 

South Korea, despite its high incomes, is also still classified as part of Emerging Asia and makes up 15% of the index. The country’s world-leading virus containment strategy has been widely praised, says Suhyoon Lee for Quartz. A programme of “stringent testing, contact tracing and isolation” has kept case numbers down without the need for the sort of strict lockdown measures imposed elsewhere. The country is even going ahead with elections next week.

Asia will not escape the global downturn of course. Although many governments in the region have brought in effective containment measures, a “second wave” economic effect is incoming as lockdowns elsewhere cause global demand to dry up, says Deutsche Bank. That is bad news for the region’s export-dependent economies. Some places look ill-prepared. The Indian economy “essentially won’t grow at all this year” and the economic cost in Malaysia and the Philippines could prove “exceptionally large”. 

As in other regions, the pandemic will take a big chunk out of local earnings per share, says Mike Kerley of Henderson Far East Income Fund. Nonetheless, investors should note that businesses in many Asian countries have high levels of cash on their balance sheets and lower payout ratios than peers in the West. That leaves them better positioned to continue making payouts. “Asia will stand out as a relative beacon of stability for the income investor”.