What Emerging Markets will look like after Covid

A monthly insight from James Syme and Paul Wimborne (pictured), managers of Pendal’s Global Emerging Markets Opportunities Fund 

• As vaccination rates increase we’re starting to see what a post-Covid world will look like
• Suggestions of a ‘new-normal’ are often wrong, but some recent trends will endure
• Find out about Pendal Global Emerging Markets Opportunities Fund

As US author William Gibson said: “the future is already here — it’s just not very evenly distributed.”

From an investing viewpoint, the big change in developed and emerging economies is the shift in fiscal and monetary policies.

Support to economies and financial systems after the 2008 crisis was at the time shockingly large. But it has been dwarfed by the stimulus response in 2020-21.

JP Morgan estimates the balance sheets of central banks in developed economies will increase by US$11.7 trillion in 2020-21. The aggregate size will be US$28 trillion by the end of this year.

In most of these countries central banks are the biggest single buyer of government bonds due to those economic support programs as well as vastly-expanded healthcare systems.

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As economies recover, policy focus is turning to ending quantitative easing and tightening policy. But this is deliberately slow.

The stimulus will sit on government and central bank balance sheets for years to come, but the tapering is carried out with an eye on allowing inflation to run at higher levels.

This tolerance of inflation should be a net positive for nominal GDP growth around the world and also for commodity prices.

This should create a different, more positive, economic environment for more indebted and more commodity-intensive emerging economies.

The enduring ‘new normal’

We have seen signs of shifts in some industries in Emerging Markets.

Suggestions of a “new normal” are often proved wrong, but some recent trends may endure.

The move to an online, digital and e-commerce-based world is a long-term trend, but that trend has accelerated markedly in the last 18 months. Most companies that have benefited expect to keep their new customers.

We have various exposures to this theme in the portfolio, particularly food delivery and online games.

Another shift likely to endure is the shift in travel and tourism patterns.

International travel has collapsed, but so, noticeably, has business travel.

This has been partly replaced — particularly in big countries such as Brazil and China — by very strong growth in internal travel and tourism, including high-end travellers who would previously have gone abroad. Wide-body jets normally used for international long-haul flights are now servicing internal tourist routes.

There has also been a strong rise in dedicated freight flights as cargo capacity in passenger flights declines and e-commerce volumes ramp up.

Also, online bookings continue to replace brick-and-mortar travel agents. We have exposure to all these trends in the portfolio.

Covid drives political change

Covid has driven changes in the stability or direction of politics in several countries.

Some governments have overseen weak or chaotic responses to the pandemic. In places where infection rates and death tolls have been high, it’s been difficult or impossible to govern.

The main incidence of this has been in Latin America, where the human impact of Covid has been worst.

We wrote in June about the challenging political environment in smaller countries of the region. The human and economic impacts of the pandemic have been major drivers of the swing towards populism or socialism in Chile, Peru and Colombia.

A combination of Covid-driven lockdowns and poverty have led to the worst unrest in South Africa in more than 20 years (though it’s yet to coalesce into a coherent political movement).

Where populists are in power, the pandemic has been a major challenge to incumbents’ popularity.

We see this starkly in Brazil, where opinion polling on the Bolsonaro presidency has largely tracked Covid case data.

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In Turkey, economic stress is elevated because of policy mistakes as well as the impact of Covid. But the effect is that the governing Justice and Development Party (AKP) and President Erdogan are closer to losing power than at any time since the AKP came into power in 2003.

Governments claiming to operate on a more technocratic basis (sometimes using this as an excuse for holding to weaker democratic values) have not been immune.

In Malaysia the governing Bersatu party lost its coalition partner and was (at the time of writing) using the pandemic-driven suspension of parliament as a tool to cling to power.

So far only the smaller Latin American countries are showing evidence of permanent change as a result of Covid. But there will be many electoral cycles in emerging markets in the next few years.

The pandemic may well prove a decisive factor in next year’s elections in Brazil, Colombia and the Philippines.

Some of these changes may not prove lasting, and doubtless others will appear. But it is definitely the case that the post-Covid world will differ from what came before.

Investors need to factor in those risks and opportunities.

About Pendal Global Emerging Markets Opportunities Fund

James Syme and Paul Wimborne are senior portfolio managers and co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here.
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here.