Emerging Markets Rally as Economies Reopen in the Second Quarter

The COVID-19 pandemic continues to impact economies across the globe as they emerge from lockdowns, including emerging markets. Our Emerging Markets Equity team provides an overview of developments over the past month, and takes a look at how the pandemic is driving a trend toward deglobalization as well as new innovations.

Three Things We’re Thinking About Today

  1. Geopolitical risk returned to the forefront as border tensions between China and India heightened, with the latter imposing economic measures including banning 50 Chinese apps and canceling government contracts with Chinese contractors. Although India has also renewed efforts to limit imports from China, we believe this would be challenging in view of India’s dependency on Chinese end-products as well as raw materials/machinery for its manufacturing supply chain. While geopolitical headlines relating to China have created noise and near-term uncertainty in recent years, they are unlikely to derail China from its path to recovery, in our view. The latest stimulus measures, including sizable fiscal spending, announced at the National Party Congress in late May, should provide positive catalysts to the domestic recovery in the nearer term. The government did not set an explicit growth target for China’s economy for 2020 due to the high level of uncertainty around the pandemic and global situation. However, it emphasized that employment as well as social measures (protecting basic livelihood) will be key priorities this year. This implies growth support and continued measured and targeted policy stimulus—with room for further stimulus if necessary—consistent with the trend Chinese policymakers have set thus far.
  2. The COVID-19 pandemic continues to add momentum to the discussion on deglobalization. This term has many potential meanings. It could simply refer to the re-shoring of certain strategic businesses, a reduced reliance on foreign supply chains, or the creation and/or support of national champions. However, some portray it to mean something more material. For instance, the collapse of international trade agreements and the organizations and associations that oversee them. So far, there is little evidence to suggest the latter is the case. Our view is that not all countries are keen to disrupt existing trade relationships. In fact, many continue to seek renewed trade deals, deepening their integration with others. Recent trade agreements include that between the European Union (EU) and Mercosur, while pending trade agreements include those between the United States and the United Kingdom. There are many positive examples across the globe of the benefits of trade and its ability to create wealth and opportunities for countries. Over the period 2009-2018, for instance, South Korean exports of goods and services rose by close to 60%, helping to fuel a nearly 30% rise in per-capita net income.1