Asia: a beacon of emerging-market stability?

Emerging Asian markets could ride out the turbulence better than peers in Latin America and elsewhere.

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”. 

Recommended

I wish I knew what an emerging market was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an emerging market was, but I’m too embarrassed to ask

This week's “too embarrassed to ask” explains what emerging markets are, and why you might want to invest in them.
9 Sep 2020
Bullish investors return to emerging markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
The Arab Spring ten years on: a revolution that failed to blossom
Global Economy

The Arab Spring ten years on: a revolution that failed to blossom

Ten years ago, the Arab world was rocked by mass protests and popular uprisings that ousted long-reviled dictators. For the most part, the end result …
23 Jan 2021
The charts that matter: inflation, bubbles, and booze
Economy

The charts that matter: inflation, bubbles, and booze

As US stocks head higher into bubble territory, John Stepek looks at the charts that matter most to the global economy.
23 Jan 2021

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Inflation is the easiest way out of this – just don’t expect politicians to admit it
Inflation

Inflation is the easiest way out of this – just don’t expect politicians to admit it

The UK government borrowed £34.1bn in December, a record amount for that month. Britain's debt pile now amounts to 100% of GDP. How are we going to pa…
22 Jan 2021
When will the US stockmarket bubble burst?
US stockmarkets

When will the US stockmarket bubble burst?

With US stocks more expensive than before the Wall Street crash of 1929, there are growing signs of “mania”. But what will push markets over the edge?
22 Jan 2021