Franklin Templeton: Emerging Markets Insights

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Three Things We're Thinking About Today

1. Along with other major economies in the world, India has taken bold steps to contain the spread of COVID-19. It enforced a complete lockdown on March 25 by sealing international borders and restricting domestic travel. While the government subsequently extended the lockdown period into May, some restrictions were relaxed in selective states with limited or no new cases. The differentiated restoration of some normalcy with specified conditions should help the economy to gradually restart. The government also announced a US$22.6 billion economic stimulus plan, providing relief for those millions affected in lower-income households. The Reserve Bank of India (RBI) provided additional support, stating it would do “whatever it takes” to support the economy and maintain its accommodative stance, which helped restore some confidence in financial markets and boost liquidity. For companies, we think balance sheet resilience is now crucial as the impact on businesses largely hangs on when the economy will reopen.
    
2. Adding to Brazil’s COVID-19 woes, political uncertainty heightened in April following the resignation of the country’s popular justice minister and the president’s dismissal of the country’s health minister. Although the number of COVID-19 cases in Brazil surpassed 100,000 in early May, some states and cities have started to ease restrictions to help reduce the economic impact of the outbreak. The government has also announced fiscal measures to support the population and economy, while the central bank lowered its key interest rate to a record low level in recent months. A key concern for Brazil, however, is its high debt/gross domestic product (GDP) level, which will increase further as a result of the fiscal stimulus. Assuming a one-off impact over 2020, debt/GDP levels could decline over the longer term as the country refocuses on much-needed reforms. While the short-term situation in Brazil remains volatile, we remain positive on Brazil over the longer term and continue to favor domestic-oriented themes including financials, infrastructure and consumer-related sectors, which we believe should benefit from the country’s economic recovery.
    
3. We have started seeing signs of recovery in the information technology sector, with the MSCI Emerging Markets Information Technology Index rebounding over 20% from its recent low in late-March.1 In times of crisis, businesses tend to adapt accordingly, and embrace technology much more quickly. This is what we have witnessed in recent months, with many businesses moving from offline to online. Education is a good example of that; schools have embraced the use of online technologies to provide a learning platform for students. E-commerce, internet and software companies are also benefiting from an increase in online activities. Acceleration in internet usage and penetration will continue driving growth in cloud and other network architecture, increasing demand for servers and other memory intensive devices. Additionally, we expect China and other major economies to continue to push forward with their 5G (fifth-generation wireless technology standard) rollout, which will support growth for suppliers into that industry. Over the long term, technology evolution and digitalization is expected to continue. In our view, the current situation will probably accelerate the adoption and development of some of these themes going forward.

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