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14 I Companies & Markets bne July 2020
in Latin America,” says Salter. “But this has now shifted, with relatively more risky Brazil, Colombia, Argentina outperforming strongly in Latin America, Indonesia and the Philippines in Asia, and even Turkey starting to perform in EMEA. Not all ‘risky’ markets are participating, with Pakistan (0.02% of the MSCI EM index) up just 3% and Egypt (0.12% of the MSCI EM index) down 1.5% since the start of the ‘risk- on’ rally on 13 May.”
The story is the same if you look at sectors rather than countries. Unsurprisingly, the healthcare sector is the only one to have booked gains this year, but analysts say that healthcare has overshot its fair value and now looks expensive.
The other sectors remain undervalued and their stocks cheap. Industrials are a good bet, says Rencap; however, financials and consumer stocks are a lot more exposed to the effects of the virus and so more dangerous.
“Energy offers 33% upside to its Jan-Feb peak, financials 31% and real estate 28%. But healthcare would have to fall 10% to reach its Jan-Feb peak, and communication services has just 2% upside,” Salter says.
Potential upside ($) if MSCI emerging market country indices return to Jan-Feb 2020 pre-coronavirus sell-off peaks
Where does the market go from here?
Is it too late to get into the market? Unfortunately we are in uncharted territory here, says Rencap, as the strength of the recovery is unprecedented. Following the 2008 crisis the Ukrainian investment bank Dragon Capital did a survey of previous recoveries and found they typically take between 3.5 and 4 years to regain previous highs, but according to Rencap EM stock markets around the world stand a good chance of regaining their January levels before the end
of this year.
“Unfortunately, previous recoveries don’t give much of
a signal at this point,” says Salter. “77 days after the low and with EM equities up 32% from the lows, this is now – just – the strongest recovery of the five major EM collapses – where MSCI EM has fallen by more than a third in dollar terms.
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At this stage post-98 low, EM equities were up 31%; post-01, 29%; post-08, 21%; and post-16, 18%.”
Compared to previous crises from here, previous recoveries saw two consolidations before further rallies in 1998 and 2016, one decline to within 5% of the lows (2008) and one further rally before dipping to within 5% of the lows (2001).
Salter spells out the details of each recovery:
• 1998’s recovery consolidated at this point around current levels for three months (which would take us to mid- September 2020) before resuming the rally.
• 2001’s recovery saw a further 15% rally over the next four months (taking us to mid-October) before giving almost all of the gains up to end up just 4% above the crisis lows ten months from now (equivalent to April 2021) and even after that the recovery was lumpy.
• 2008’s recovery gave up almost all its gains from this point over the next 50 days (taking us to the equivalent of end-July) to end up just 4% above the crisis lows before beginning
a more sustained recovery.
• 2016’s recovery consolidated around these levels
for 9 months (taking us to February 2021) before resuming the rally
As ever with EMs, the stock markets remain unpredictable, as most are missing the foundation of institutional investors like pension funds and insurance companies that make very large and very long-term investments that provide some stability to prices. All the markets remain prone to shocks. And there are plenty of potential shocks in the works: a second wave
of the coronavirus, a breakdown in the OPEC+ deal, a new trade war between the US and China as the November US presidential election approaches and now even a “coloured revolution” in the US does not look entirely impossible.
Recoveries from the big-5 EM equity collapses (1998, 2001, 2008, 2016, 2020) in $, rebased to 100 at market low.”