Collective immunity against Covid-19 may still be a long way off. But investors seem safe from worrying, for now.
The so-called Delta variant of Covid is crossing East Asia’s growth belt. The Indonesian regional giant recently seized the crown of the pandemic epicenter, with cases quadrupling in one month. The markets remain largely unfazed. “Our baseline scenario is that it won’t be very disruptive,” says Alejo Czerwonko, investment director for Emerging Markets Americas at UBS Global Wealth Management.
iShares MSCI Brazil
the exchange-traded fund (ticker: EWZ) jumped almost 30% from the March low. the
iShares MSCI Inde
The ETF (INDA) is up 13% from the April low.
India bounced back in part because the government’s response to the latest wave of Covid was more focused. Prime Minister Narendra Modi ravaged his economy with a nationwide lockdown last year. This time, he left it to the local authorities.
It is now clear, albeit unfortunate, that Covid is hitting the poorest people and the small informal businesses that support them harder, notes Josh Rubin, co-portfolio manager of the Thornburg Developing World Fund. Large publicly traded companies can use calamity to cut costs and consolidate market share. “Materiality for investable companies is not the same as materiality for headlines,” he says.
Latest outbreaks push central banks to keep interest rates low for longer, another boost to investable names and their wealthier clients, adds Venkat Pasupuleti, co-portfolio manager for India at Dalton Investments . The Reserve Bank of India stood at a record 4% last month, accelerating the loan and construction boom. “It’s like bad news is good news,” he says.
Many companies in emerging markets are dependent on global demand, which is sizzling as the United States and Europe emerge from Covid. Iron Ore Giant
(VALE) and oil exporter
(PBR) represent 30% of the Brazilian stock index. Software contractors such as
Tata Consulting Services
(532540: India) are anchor points for the Indian market. Low interest rates are also pushing retail investors, who previously relied on bank accounts, to stock markets (and even stocks) around the world, Pasupuleti observes. “Speculative activity is more of a concern than short-term weakness,” he says.
The persistence of Covid could result in longer-term costs for Brazil, India and other emerging markets. Heavy anti-pandemic spending has exacerbated Brazil’s chronic debt distress, with little chance of reducing it before next year’s presidential elections. Modi’s job runs until 2024. Health emergencies could further distract attention from vital structural reforms, says Tom Masi, co-head of emerging wealth management strategy at GW&K Investment Management. “They need to improve contract law, labor law, foreign ownership, infrastructure,” he said. “Are they going to go fast enough?”
All bets are off if Covid reappears in China, a hub and not a radius of the global economy. Beijing is (belatedly) increasing its vaccination game in response, administering a billion vaccines since May 1. Doubts remain about the ability of Chinese vaccines to fend off the Delta variant. But for now, investors are more worried about the outbreak of Chinese regulatory measures against benchmark internet companies. This is what really plagues emerging markets.