The COVID-19 outbreak is affecting Asian economies through many direct and indirect channels. In summary:
- A decline in tourism revenue
- Weaker consumer demand for local services
- A decrease in business cashflow
- The negative effect of tighter labour mobility on the supply chain
- Dwindling Chinese demand
- Supply-chain bottlenecks and a drop off in production that is being driven by a shortage of parts and components – particularly in economies that are heavily dependent on Chinese imports
- Less demand from the rest of the world, as the outbreak spreads to other markets
- Limited access to credit given financial-market volatility
As with most things in markets, any investment thesis depends on the investment horizon.
In the short term, the market may turn its attention to those economies that could become the next COVID-19 hot spots. Worryingly, there have been rapid increases in the confirmed cases reported in Indonesia, India and the Philippines—these are the region’s more populous economies with a more significant share of its low-income households, thinner social-security nets and weaker health infrastructure. These markets have also recorded a higher proportion of deaths, which suggests that the actual number of virus-related infections could be greater than reported due to their lower testing capacity (a function of health infrastructure).
If we look at the longer-term picture, many independent issues have been exacerbated by COVID-19. For instance, a protectionist push is now accelerating across the world, the U.S. dollar is much stronger, and oil-price volatility is creating deflationary pressures, which has implications for credit markets and financial stability. Therefore, rather than a mechanical application of the first in, first out principle, we need a more holistic approach when assessing the potential longer-term economic impact in the region.
Such a view will take into consideration the quality of health infrastructure, testing capacity and fiscal wherewithal of an economy, along with its ability to pivot supply chains and grow domestic demand. Credit and liquidity risk exposures will also be pertinent. While Indonesia, India, and the Philippines may face the near-term risk of local outbreaks, we believe their economies are among the most insulated from a longer-term growth perspective. Indeed, the Asian Development Bank’s recent scenario analysis indicates that these markets are likely to experience the lowest impact on GDP growth, regardless of timescale.
Near-term newsflow may be negative, particularly as these markets deal with domestic outbreaks; however, the impact of the COVID-19 must also be viewed in a longer-term context. To this end, we believe Southeast Asia should emerge from the pandemic with resiliency.
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange trading suspensions and closures, and affect fund performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the fund’s performance, resulting in losses to your investment.
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.
The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.
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