Four reasons to be optimistic about emerging market bonds
Emerging market bonds have had a pretty mixed year so far. Those that are issued in ‘hard currency’...
The UK has now been in lockdown for more than 40-days, forcing all of us to change the way we live our lives.
Working from home has become the norm, as has our increased reliance on the internet. The next few weeks should hopefully see lockdown rules relaxed, but for many of us this has been the most unique couple of months of our lives and the impact will be felt far into the future.
Below are four trends the coronavirus could accelerate – changing us, and the world around us, faster than previously thought.
Arguably, the biggest economic trend of this century has been the rise of Asia as the world’s global growth engine – with the US on the losing end. According to the World Economic Forum, Asia’s GDP was set to overtake the rest of world combined in 2020 with the region accounting for roughly 60% of global growth by 2030*.
Trade Wars have possibly been a side show to the fact that the US economy has faced large headwinds while the Asian economies – in particular China – have had large tailwinds, such of the rising middle class and move towards urbanisation.
Murray International investment trust manager Bruce Stout says: “Over a decade of reckless financial engineering leaves numerous companies exposed to the so-called Developed World with over-extended balance sheets, deteriorating credit worthiness and an opaque outlook for earnings and dividends. Yet in Asia and emerging markets the post-pandemic landscape will likely remain abundant in investment opportunities.
“Significant pent up demand driven by favourable demographics, robust savings, rising real incomes plus greater intra-regional trade and self-sufficiency suggests for the numerous under-leveraged companies exposed to such trends, a return to some semblance of normality should prove relatively straight-forward.”
Technology has obviously played a part in the rise of working remotely (be it from home or hot-spotting during a day of meetings) but this working culture is set to change dramatically once offices reopen. Many businesses will realise they can keep going and work well, without people being in the office for a full working week.
Microsoft’s cloud solutions – in particular communication tools such as Skype – as well as its 365 suite, are allowing workers to find the flexibility that the current environment demands. Many have used these new productivity tools for the first time, and we can expect usage will persist well beyond the end of the lockdown period. The use of Zoom as a meeting tool has also increased exponentially.
Schroder US Mid Cap fund manager Bob Kaynor says: “The past two months have highlighted the reality of what we are capable of doing away from the office. Companies will think about their physical footprint and how they operate. We’ve had calls with 45 companies at the peak of outbreak and it’s been encouraging and fascinating how many have already taking cost action, cutting capex and reducing discretionary spend – already responding to the environment – corporate office and plant manufacturing environments will change.”
The healthcare sector had a lot of tailwinds before this pandemic, including a number of structural factors such as aging populations across the globe, as well as the rise of the middle-class in many emerging economies. All these factors suggest greater demand for drug treatments and medical care over time.
The TB Amati UK Smaller Companies fund currently has 11.4%** in the healthcare sector, including the likes Dechra Pharma and Oxford Biomedica. Fund manager Paul Jourdan says: “History shows we tend to spend the next decade trying to solve the previous crisis – as was the case with banks following the credit crunch. This is why healthcare will be more important – not just in the search for a vaccine – but in the next decade following the financial crisis.”
Rathbone Strategic Growth Portfolio manager David Coombs says: “The future will be about smart medical devices that can collect data on our health through smart phones, and virtual visits to the doctor. I’ve always believed that you should invest in a tailwind and we have one now in healthcare: every government in the world needs to provide more healthcare for less money.”
This is a trend that has been gradually growing since people started using the internet in the 1990s, but the rise of Amazon and other online retailers has seen it become a life-saver for those who are short on time. Everything from clothes to food is regularly ordered online – habits that are likely to continue following this pandemic, as we move away from paying in person and in cash.
Smith & Williamson Artificial Intelligence manager, Chris Ford cites the likes of online food retailer Ocado as a good example. He says: “Ocado is the clear leader in providing e-commerce solutions to large grocers around the world’ he said.
“Much of the current coverage focuses understandably on the UK retail business, but we will be more interested to see how much of the online ordering activity persists beyond the end of the acute phase of the current crisis. We suspect that consumers’ habits will be seen to have changed. For those grocers that have not thus far invested in a robust e- commerce solution, we suspect that Ocado will be the supplier of choice.”
T. Rowe Price Global Focused Growth Equity fund manager David Eiswert says: “Communication, entertainment, commerce, health care and education have suddenly switched to become remote and digital with an order of magnitude we could never have imagined in the short term. Digital is no longer supplemental—it is primary. Barriers to adoption have crumbled through that necessity, and we expect lasting behavioural and attitude changes, including society’s stance on the internet, which has softened during the crisis.”
*Source: World Economic Forum
**Source: Figures at 31 March 2020