COVID Impact Varies Across Emerging Market ETFs

[This article appears in our October 2020 issue of ETF Report.]

The coronavirus has had a devastating impact across the globe, hitting emerging market countries with varying degrees of severity.

New cases of COVID-19 are still climbing globally. The top three countries with the highest reported cases and death totals are the U.S., Brazil and India. As of late August, emerging markets in the Americas occupied five of the top 10 spots: Brazil, Peru, Mexico, Colombia and Chile, demonstrating how that region has been hit the hardest.

Kevin Carter, creator of the Emerging Markets Internet & Ecommerce ETF (EMQQ), is concerned about how the coronavirus will continue to affect emerging markets, particularly in countries with high population density.

“I’m really worried about the human toll,” he said.

The outbreak began in mainland China and quickly spread to the rest of Asia, Europe and the Americas. Of all the regions, Carter observes that Asian countries appeared to control the virus better, perhaps because of traditional hygiene practices such as wearing masks when ill.

Ed Lopez, head of ETF product at VanEck, says several factors determined how successfully certain countries responded to the virus, including geography, populations and general attitude.

“While it probably wasn’t great for human rights, China has the ability to lock down their nation, to shut down cities and force people to comply,” Lopez explained. “Perhaps that helped them quite a bit more versus what you’re seeing in Brazil, where there’s a confusing, conflicting approach.”

Impacts & Recovery

The coronavirus caused a global recession, but how each of those country’s markets rebounded in part depended on the sector, explains Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA Research.

The best-performing single-country ETFs had a heavy exposure to technology and growth-oriented communication services. To him, it’s not surprising that single-country ETFs such as the iShares MSCI Taiwan ETF (EWT), the iShares MSCI South Korea ETF (EWY) and the iShares MSCI China A ETF (CNYA) performed well.

EMQQ’s Carter believes China has advantages over other countries, noting the centralized and authoritarian government can stop outbreaks, in addition to having technology for contact tracing by using phone apps.

“By all accounts, China’s economy is bouncing back,” he noted. “Apple, Starbucks and Tesla are telling us that people are in stores and buying things. So that’s a real advantage for China.”

A China critic, Perth Tolle, founder of Life + Liberty Indexes, and creator of the Freedom 100 Emerging Market ETF (FRDM), says advisors should look to Taiwan and South Korea as standouts in dealing with COVID-19—not just in emerging markets, but compared to the rest of the world.

“They were very fast acting and they were very transparent,” she said.

In the initial outbreaks, Taiwan’s and South Korea’s transparency pressured their respective stock markets, Tolle explains, but since then, their markets have bounced back stronger than China’s. She also noted that because of South Korea’s aggressiveness in tackling the disease with testing, contact tracing and quarantining, they did not lock down their economy.

Figure 1

Source: Bloomberg, data covers 1/2/2020-3/31/2020

Figure 2

Source: Bloomberg, data covers 4/1/2020-8/31/2020

Performance Diverges

To contrast China with Taiwan and South Korea, she points to performance charts for the Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) versus those for EWT and EWY from Jan. 2 to March 23, which covers the beginning of the drawdown in Asia’s markets to the market bottom, and then from March 23 to late August (see Figures 1 and 2).

Tolle notes China started its market-enhancing measures such as restricting stock sales just after the Chinese New Year holidays at the beginning of February. On July 6, the government took out a front page ad in the Security Times, a state newspaper, telling Chinese citizens to buy stocks. She attributes a spike in China’s market on that day to the ad.

Alon Ozer, chief investment officer of Omnia Family Wealth, agrees that Taiwan and South Korea not only handled the cases better, but may emerge in better shape than most emerging markets because of how they controlled COVID. He also puts Singapore on that list for the same reason.

“These smaller countries in emerging markets know what would be the cost of having so many patients,” he said. “So they have to really be on top of the situation, as it’s much easier and cheaper to prevent it than actually dealing with it.”

Carter notes that he’s watching India, too. The country has the third-highest number of reported cases and death rates, but some initial news reports show that some areas, such as in Mumbai’s dense slums, 60% of residents show evidence of infection and recovery, and that new cases in the cities are starting to slow.

Yet even as the number of cases may be declining in the cities, they are rising in rural areas, suggesting that India has had trouble slowing the spread, VanEck’s Lopez notes.

Looking Ahead

As the world continues to deal with the coronavirus, Tolle believes Taiwan and South Korea are poised to continue their rebound and will benefit from the trend of decoupling and supply chain diversification out of China.

“Being world leaders in semiconductor technology makes them even more important to the U.S. going forward,” she said, pointing specifically to Taiwan Semiconductor and Samsung.

Omnia’s Ozer agrees with Rosenbluth that the countries with a technology sector are likely to do well, along with those with a good health care and biotechnology industry: “At this point, the smart thing to do would be to focus on certain sectors.”

Two examples of his thinking include the KraneShares CSI China Internet ETF (KWEB) and the KraneShares MSCI All China Health Care Index ETF (KURE).

Even though India continues to struggle with the spread of the virus, Lopez suggests the outlook for the country is positive if it can get back to implementing its economic reforms with more foreign direct investment and privatization.

He adds that initiatives to expand internet access with its Digital India program could lead to long-term growth as that infrastructure builds out: “I think it’s one of the most exciting EM stories.”

In Latin America …

While certain Asian countries are recovering, Latin America continues to struggle. The outbreak in Brazil, an emerging market previously known for its robust health system, “was a case of a total failure of leadership,” Ozer said.

CFRA’s Rosenbluth points out that Brazil’s economy was already hard-hit before the coronavirus, so he’s not sure how connected it may be to current ETF performance. Brazil has more exposure to energy and materials, two sectors pummeled by the slowing global economy.

For other emerging markets hit hard by the virus such as Mexico and Russia, it’s harder to extrapolate weak ETF performance and COVID-19. “It might be correlated, but it just as easily might not be,” Rosenbluth noted.

Rusty Vanneman, chief investment officer at Orion Advisor Solutions, sees potential investments in Latin America despite coronavirus problems: “I actually think Latin America looks intriguing, because it’s been beaten down so hard by COVID.”

He says the region’s sensitivity to commodity prices, along with a weaker U.S. dollar, may set it up for a rebound. Vanneman notes that, for now, he’d use a broad-based regional index ETF for exposure, such as the iShares Latin America 40 ETFs (ILF), the biggest by assets under management.

“If an investor thinks that inflation expectations continue to move higher, the dollar continues to get weaker,” he explained, “then the relative valuations for emerging markets are very attractive, particularly in Latin America.”