If this success persists, these countries can begin the road back to normal and resume economic growth sooner than the US. And such countries may be fertile ground for finding EM winners, based on bottom-up research and risk/reward analysis on individual companies.
Pandemic Speeds Up Change
With more than 1 billion people around the world adopting the new normal of at-home work, education and entertainment, shifting consumer habits are creating new investment opportunities in EM. For example, in many EM countries, the pandemic is accelerating the use of technology across many areas.
Online games are another area seeing faster growth because of the pandemic. Staying at home includes playing at home, bringing even casual gamers into the fold in ways that could shape how they spend their time for years to come. Prescient EM online game publishers are benefiting from the tailwind of a fast-growing game user base. Likewise, e-commerce is a force for change in EM, where online shopping has exploded; in China alone, online grocery sales have jumped more than 100% in the months following the start of the outbreak.
Select cloud providers and data centers are also helped by the urgent need among many enterprises—whose workforces are almost entirely remote—to digitize operations and enable remote work. The stay-at-home wave is also fueling data consumption and demand for server capacity and, in turn, for processors and memory chips, many of which are made by EM companies.
Beyond Tech, Other Segments Show Lasting Potential
Besides technology, changing consumer habits, which are likely to persist long after COVID-19, are creating opportunities in other industries. Cleaning services and personal hygiene products are two distinct areas undergoing rapid growth. For example, environmental cleanup companies that specialize in medical waste removal are well positioned to meet rising demand from overwhelmed hospitals and other healthcare facilities. Similarly, EM-based makers of personal hygiene products are benefitting as are providers of personal protective equipment (PPE). Until the outbreak, PPE wasn’t widely adopted across EM countries, but now healthcare providers and consumers alike are scrambling to improve hygiene standards. With the disease’s tendency to unexpectedly resurge, strong demand for these products isn’t likely to wane any time soon.
Ex Asia Opportunities Are Solid Yet Scarcer
Early to suffer the pandemic, some Asian countries have been among the first to turn the corner. But progress in other regions is mixed. That’s why stock pickers must tread carefully when evaluating a company’s vulnerability or growth potential based on local economic factors, including how they’re handling the outbreak.
For example, Russia’s economy is struggling after a one-two punch from the pandemic and the collapse in oil prices. But select Russian companies may benefit, in our view, when oil starts to rebound and if the depressed US dollar starts to gain traction. And in Brazil, the pandemic is proving uncontrollable and the country’s market is down nearly 40% through June 30, in US-dollar terms. But some Brazilian companies are getting through the crisis with the inherent strengths they had going into it. Companies with strong balance sheets and cash flow, for example, will outperform their peers and benefit from greater availability of debt driven by economic stimulus, in our view. The pandemic could also lead to consolidation within key industries, resulting in strong companies—currently trading at depressed valuations—emerging from the crisis even stronger.
While each country’s experience is unique, many EM nations are now into some level of recovery mode. As countries turn the corner, growth opportunities will become more visible. Even amid current challenges, we believe select EM companies that benefit from secular trends present investment opportunities today, with the potential to deliver results for patient investors as the pandemic’s clouds lift over time.
