Global Emerging Markets Update - October 2020
12 November 2020
This report has been prepared by Northcape Capital, the underlying investment manager for the Warakirri Global Emerging Markets Fund.
- After the September correction, EM capital markets resumed their recovery over October driven primarily by the prospects of Biden-Harris ticket winning the US presidential election (positive for global trade and investment which EM in very leveraged too). Lower new COVID-19 case numbers and deaths – especially in Brazil and India assisted the EM bounce back as well. The past month saw the EM US$ index rise +2% taking the 2020 YTD return to -1%.
- For most EM countries the growth rates of new COVID-19 cases are slowing (even with increased testing). This started to happen in September and the trend has accelerated over October – which is positive for economic recovery as the all-important mobility rates start to normalise.
- In the wake of the global COVID-19 economic slump, the breadth of central bank easing across global capital markets is totally unprecedented with a net 178 policy rate cuts over the past 9 months alone.
- EM central banks are acutely aware of potential currency vulnerabilities if they attempt aggressive QE – without “reserve” currencies. Additionally, many EM governments have a general commitment to conservative fiscal policy (some dictated by legislation), typically a result of past experiences during episodes of economic/fiscal crises. In sum, this has led to a much milder monetary and fiscal response from EM to the economic shock of COVID-19 relative to DM.
- The onset of deflation and low bond yields will make those companies that can grow their cashflows in real terms over the long-term even more valuable. This underscores the value an active fund manager can provide by essentially investing in EM companies that can “structurally grow” their cashflows in an environment of global deflation.