As the initial shock of the coronavirus outbreak in China hit financial markets, stock markets across the globe were collectively punished by nervous investors.
But the effects were not felt equally across international markets.
China was hit hardest, but emerging markets across Asia also faced punitive share price falls.
Heartwood Investment Management’s Jaisal Pastakia asks: “Was this fair?”
A question he addressed in a recent insight report.
Diverse and varied
Emerging markets are often lumped together as a homogenous group, with what hurts one developing economy automatically assumed to hurt another.
Certainly, these economies do have some things in common; most EMs are negatively impacted by a strong US dollar, for example.
There is also a general assumption that developing economies (particularly those within the same region) will be heavily dependent on one another for trade, supply chains, and even political stability.
However, the term ‘emerging markets’ actually covers a diverse range of economies, with different (and changing) vulnerabilities and strengths.
And while there are certainly kernels of truth in the idea that supply chains are shared across borders, and regional trends can spread, in reality the levels of interaction between different emerging markets vary hugely, argues the investment manager.
Varying dependence on China
As stock markets across the globe attempt to stage a recovery following the coronavirus scare, Asian markets have been recovering too.
The potential long-term effects of this viral shock – whether significant or mild – remain challenging to predict, but authorities in China are taking concerted steps to support the economy.
In the meantime, there are other issues at play as China’s economy attempts to recover in practical terms.
Though production is slowly limping back into action, many factories and workplaces remain closed, and there are concerns about the impact on China’s growth in the near term, as well as global and local supply chains.
So, how does this affect other emerging markets in the region?
Asian emerging markets tend to be exposed to China in one of two ways: trade (including global supply chains) and tourism.
China’s relationships with its regional neighbours are therefore worth considering.
Some of its top trading partners are found among its nearest neighbours, including Taiwan, Malaysia and Vietnam.
As a result of heavy trade reliance, economies like these have been exposed not only to stock market falls amid the initial coronavirus fears, but also to potential supply chain issues and growth concerns in the wake of the virus’ impact. Is this the case for all Asian emerging markets?
A near neighbour, but distant economy
There are a number of Asian economies with surprisingly limited exposure to China, relative to other emerging markets in the region.
The list includes Indonesia, the Philippines, and – perhaps more so than any other Asian emerging market – India.
Let’s be clear: India is not completely unexposed to China.
There are certainly risks to its reliance on China in key areas, particularly the nascent Indian electronics sector (including its mobile phone industry).
But on a relative basis, India is less vulnerable to fluctuations in the Chinese economy than its Asian peers.
According to data from the end of 2019, India imports around $70bn (£54.6bn, €63.4bn) in goods from China on an annual basis, which sounds substantial, but not when placed in the context of India’s total global imports of $330bn.
It is also has low reliance on Chinese consumers, exporting just $17bn to China (among a total of $514bn in global exports).
What’s more, Chinese tourism in India is negligible, leaving India relatively invulnerable to changes in Chinese travel.
Heartwood investment positions in India and China
As a house, Pastakia says Heartwood IM sees good relative value and high growth potential in a range of developing economies, and our portfolios have an overweight allocation to emerging market shares.
Within this allocation, the tean has some explicit preferences for specific stock markets, including the Indian market.
Its positions include a fund with a natural skew towards mid-sized Indian companies, which he says looks relatively good value versus the wider domestic stock market.
They are also exposed to India through its bond market, which the tem accesses via a fund investing in both corporate and government debt.
“We should point out that, despite attractive economic dynamics, India has plenty of its own challenges, a recent example being weaker domestic consumption following banking sector issues,” Pastakia adds.
“Hopefully, the worst of this has now passed, and it is worth noting that we invest in India for a variety of longer-term reasons, including its fundamental growth potential and fast-developing financial markets, rather than for its lack of exposure to China or its coronavirus status.
“Indeed, another of our emerging market preferences is for China’s onshore stock market, which is reflected in our portfolio positions as well.
“Near-term volatility amid the coronavirus scare is spurring further action from authorities in China; if this continues, it will be welcomed by stock market investors.”