As individual countries, states, industries and companies plot their emergence from coronavirus closures, the pace of recovery and prospective outcomes are looking increasingly diverse. Jeff Shen considers some of the implications.
In many ways, the coronavirus pandemic has reinforced investment trends that were in place prior to the crisis. Among them: Developed markets outperforming emerging markets (EMs), technology leading all other sectors, momentum outperforming value, and U.S. stocks outpacing the rest of the world.
Yet we also have seen new trends starting to emerge. This is partly because the recovery from COVID-19 and its economic shock is unlikely to be of the same magnitude everywhere.
Using big data analysis to track the spread and trajectory of the virus, our Systematic Active Equity (SAE) team has found that the experience across countries, cities and individual markets has been very different, depending on factors such as when lock-downs were put in place and enforced, how long they remained in effect, and how virus detection and antibody testing have evolved. The result has been a level and degree of dispersion not seen for some time ― and, in turn, an opportunity for active stock selection to make a bigger difference than it has in years.
An asymmetrical outlook for EMs
In an environment where regional recovery is uneven, we see country as a unit of analysis becoming more relevant for investment decision-making. In particular, our data covering the universe of emerging countries finds dispersion has tripled since January, reaching its highest level since the global financial crisis.
We find the differing experience across emerging economies has hinged on the individual response throughout the various stages of the coronavirus crisis. For example, countries like Brazil, Russia and Mexico were slower to contain the spread of the virus with policy actions like social distancing and reduction in non-essential business activities. COVID-19 cases and deaths consequently continued to accelerate faster than elsewhere in EM, and recovery appears farther away.
Meanwhile, Asian countries such as South Korea, Taiwan and China have been faring better than other EMs given the relative strength of their health care systems. Greater fortitude on the health front has facilitated re-openings, helping to stem some of the economic damage and supporting stock prices of companies that have a higher relative exposure to those countries.
Further dispersion is evident in countries’ willingness and capacity to provide the fiscal and monetary policy support needed to mitigate the economic consequences of the pandemic. Countries like South Africa, Turkey, Mexico and Brazil look more vulnerable than the rest. We see current account deficits, levels of government debt and other macroeconomic indicators as factors that will separate winners from losers.
Open, but will they come?
As we approach the next phase of the COVID-19 emergency, we are looking to identify the main drivers of recovery in countries, industries and companies. Part of the challenge is in determining how permanent some of the changes in human behavior may be. Our data has found that even as countries and businesses take steps toward normalcy, with restaurants and stores opening their doors, consumers can be slow to return. Robust online transactions in China, which is farthest along in the virus trajectory and re-opening, indicate consumers may be content to stay home and have goods delivered.
A look at China mobile app usage, as shown below, also is telling. Since February, the biggest bounce has been seen in job search and home purchase apps, personal priorities as economic and business activity starts to normalize. Meanwhile, rebounds in ride sharing (DIDI) and driver testing (a pre-requisite to car buying in China) may suggest a continued aversion to mass transit. A smaller recovery was seen in trip-planning app CTRIP. We expect business models that require human congregation, such as cruise lines and live concerts, are likely to face structural headwinds arising out of the pandemic.
SAE has developed a framework to actively capture those tactical insights that we believe will remain relevant for as long as markets and economies are processing the effects of the coronavirus pandemic. These insights sit alongside our standard research process and incorporate real-time data processing. We believe this new input is critical in an environment where a return to work does not necessarily equate to a return to normal ― and where the world is likely to look very different than it did before any of us ever heard the term COVID-19.
Jeff Shen, PhD, is Co-CIO of Active Equities and Co-Head of Systematic Active Equity (SAE) at BlackRock. He is a regular contributor to The Blog.
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