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The global health crisis has driven a wedge between parts of the equity market. Perhaps one of the starkest examples can be found in Asia. The MSCI Emerging Markets (EM) Asia index has now recovered nearly 85% of its loss since its low in late March, but much of this is due to the performance of Chinese, Taiwanese and Korean stocks that dominate the index. Look closer and most other countries’ markets still show double-digit losses for the year. In fact, our Chart of the Week shows the difference in performance between the two groups is the largest for nearly 15 years. But economies are reopening, and this has been somewhat of a driver for market leadership. Is there an opportunity for investors in emerging market Asian equities? Asia has generally dealt with the global health crisis better than other regions, but the picture across countries is far from uniform. The case numbers of Covid-19 are large and rising in India, Indonesia, Pakistan and Bangladesh. Nevertheless, the governments of those countries are refraining from further lock-downs with the aim of avoiding any further damage to economic growth. The near-term outlook does not look good for emerging Asia, but social mobility is improving, and this may be what matters for investors. It’s important because the emerging economies have less room for expanding fiscal support, which leaves them vulnerable to external risks such as a rise in the oil price and/or US dollar. India appears the most fragile. It has had to step up spending at a time when the government’s fiscal deficit was already increasing, had missed its target and while debt-to-GDP sits among the highest in the region. As an oil importer, it would also be hit by a higher oil price. On the other hand, in Singapore the spread of Covid-19 is now under control, social mobility is increasing, and the government has committed to a large support package worth around 19% of GDP in spending, tax cuts and loan guarantees - one of the largest in the region. Meanwhile, its stock market has lagged the best performers creating some relative value. For investors who can get comfortable with the countries’ banks and property market, Singapore can offer a better balance of risk and reward than the Asian emerging markets until the US dollar establishes a firmer downward trend, which could be the real catalyst for adding risk to the laggards.
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