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bne July 2020 Companies & Markets I 13
And records there have been. The US Nasdaq stock market topped 10,000 for the first time ever this week, but investors say that its upside from here is limited.
“Equities globally (including EM) are becoming something of a TINA trade (There Is No Alternative) in a world where financial repression [governments channel funds from the private sector to themselves as a form of debt reduction] is expected to be long-lasting,” says Salter.
Salter goes on to warn that the so-called relief rallies that follow crashes can be unstable, as it takes much longer for real confidence to return that can sustain long-term recoveries. And as the charts below show, none of the markets have completed the "round trip" of regaining all the value they have lost between the fall from their January-February peaks to their March-June lows.
“Almost all the gains were wiped out at one point during the 2001 and 2008 rebounds,” says Salter. “A second wave of the virus in the autumn or a flaring up of the trade war ahead of the US election could be triggers [this time], though we believe the amount of fiscal and monetary firepower that has been unleashed globally should prevent the March lows being retested.”
Index performance (US$) for MSCI EM countries – fall from high, rebound from low and round-trip
Index performance (US$) for MSCI EM sectors – fall from high, rebound from low and round-trip
Index performance (US$) for MSCI FM countries – fall from high, rebound from low and round-trip
Timing is everything
Within the EM universe there are some big differences. Rencap recommends Russia and Central Europe within the traditional Europe, the Middle East and Africa (EMEA) patch. Vietnam and Kazakhstan are the bank’s favourites amongst the Frontier markets. “And for those sure of a V-shape recovery, add more South Africa (and Brazil/Latam/Indonesia) to the mix,” says Salter.
The hall market of EM investing is getting the timing right. From the crisis lows, the US (S&P 500) is up 43%, DM equities are up 41%, EM is up 32%, and Frontier up 16% as of June 10, according to Rencap.
“Until mid-May, the EM rally was dominated by ‘self-help’ countries, the relatively safe names with low bond yields and manageable budget deficits (or those exiting the virus earlier) – so Korea, Taiwan and Thailand in Asia, Russia in EMEA and Chile in Latin America,” says Salter.
“But a shift started within EM on 13 May, when EM currencies started to rebound and with it more ‘risky’ EMs started to outperform, such as Brazil and Colombia in Latin America, Indonesia and the Philippines in Asia and Turkey in EMEA. And since 28 May, EM itself has started to outperform DM
as confidence builds that coronavirus [COVID-19] is under control in DM and much of EM (China, Korea, Taiwan and Thailand are essentially virus free and make up two-thirds of EM), while several of the poorer EM/FM countries are seem as more likely to ease restrictions given relatively youthful (and less vulnerable) populations vs the costs of keeping lockdowns in place,” Salter adds.
None of the EM markets have completely won back all of their YTD losses, but most of them are in striking distance and Rencap speculates that returns on investments made at the start of this year will be flat in many markets in the coming weeks.
“You can see this at the country level within EM. Up until 13 May, the rally had been led by the relatively safe Korea, Taiwan and Thailand in Asia; Russia in EMEA and Chile
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