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  • The coronavirus has had an unprecedented market and economic impact this year. Still, the impact and nascent recovery differ across countries.
  • BlackRock is constructive on Asia ex-Japan equities on prospects of an eventual growth uptick.
  • We see China and South Korea as being in the early stages of restarting their economies and having greater ability to use policy in order to reboot economic activity.
  • India may face more challenges with a growing number of cases being reported.
  • Overall, BlackRock holds a neutral rating on emerging market (EM) equities. Valuations have cheapened but the global economic slowdown and cheaper oil could challenge oil-producing EM economies and the outbreak may test their public health systems.


Fears of the coronavirus outbreak and its economic toll have driven unprecedented levels of financial market volatility in 2020. Global equities, as represented by the MSCI AWCI Index plunged -21.3% in the first quarter of 2020, with many countries in Asia among the first to suffer from the both the public health and market impact due to the pandemic.1

Activity has fallen to a standstill with global economic data points such as Purchasing Managers Index registering their lowest levels on record while unemployment has started to climb. However, since Asia was the earliest region affected by the coronavirus, aggressive public health measures to contain the pandemic have slowed its spread – indeed, the infection curve for many Asia countries has shown signs of flattening. This has led to differentiated performance in regional equity markets, led by China.

Figure 1: COVID-19 spread trajectory since the 100th confirmed case

Line graph showing trajectory of virus spread in various Asian countries since the 100th confirmed cases.

Source: Worldometers, BlackRock, as of April 6, 2020.

Greater variation in government policies and medical capacities highlight the importance of differentiating among countries in approaching international investment opportunities. This has been evident in the region’s first quarter performance, with China outperforming relatively, followed by Korea and Japan where the peak of the COVID-19 outbreak has passed. The performance dispersion also speaks to the benefit of country diversification. Equity market correlations, as measured by countries in the MSCI ACWI Index, rose throughout the first two weeks in March, but were relatively low compared to the months before and after the Global Financial Crisis.2

Figure 2: Regional performance YTD

Bar graph showing total returns of MSCI country indexes for major Asian countries YTD.

Source: Thomson Reuters, as of April 6, 2020. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Looking ahead, trade will be a key driver for Asia equity markets, given their heavy economic reliance on exports. Asia countries are a significant share of the world’s total exports (Figure 3):

Figure 3: Share of world exports

Line graph showing share of world’s total exports by major countries.

Source: Thomson Reuters, as of April 6, 2020.

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Coronavirus impact and policy support

After the COVID-19 outbreak peaked on February 17th, China is further ahead than other nations in its recovery with the majority of the country’s population back to work (Figure 4). Its economy is now on a stronger footing compared to many other areas in the world where extreme quarantine measures just started to take place and could last for weeks or months.

Figure 4: World’s relative performance to China

Line graph showing relative performance of the MSCI World index to the MSCI china index, bar graph showing active cases in China each day.

Source: Thomson Reuters, as of April 6, 2020. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Since the People’s Bank of China (PBoC) cut interest rates in March, 1.2 trillion yuan has been used to provide additional market liquidity and additional fiscal stimulus was given to support small and medium enterprises3. The recent drop in oil prices and slower inflation growth may give the PBOC more room to ease policy from already very accommodative levels.

Import and export sensitivity

China’s macro data prints have confirmed the ‘first in, first out’ profile, as the country has led the recovery from the COVID-19 disruptions. The most recent official manufacturing PMI for March came in at 52, while the non-manufacturing gauge was 52.3, signaling expansion and a strong recovery from historical low levels of 35.7 and 29.6 in February.4

However, the nature of the recovery is mostly supply-side, manufacturing and domestically driven. It might take longer for the services sector to fully recover and the widening of the pandemic elsewhere in the world is likely to lead to further weakness in global demand. Imports in the first two month of the year dropped 4% YoY and exports dropped 17.2% YoY as manufacturing was delayed by the virus outbreak. However, exports are now less than 20% of China’s GDP compared to 38% 14 years ago.5

Valuations, earnings, and dividends

Chinese equities have been supported by strong monetary and fiscal easing measures to fight the economic impact of COVID-19. China has outperformed the rest of the region during the recent global selloffs. The MSCI China A index fell only 10% versus a 21% drop for the MSCI World Index and 23% for the MSCI Emerging Markets Index in the first quarter of 2020.6

Currently, forward 12 month earnings growth estimates for companies in the MSCI China index are 10.3% versus 13.4% for the broader EM region. The index is trading at a forward Price Earnings (P/E) ratio of 10.5, a value that helps investors determine the market value of a stock as compared to the company's earnings. This is higher than its 10 year average and a premium to the MSCI EM index at 10.1.7

Implementation and flows

Investors who are looking into China exposures should know the difference between the MSCI China A index, which includes domestic A shares listed onshore, and the MSCI China H index, which gives investors opportunities to access Chinese companies that are listed in Hong Kong’s stock exchange.

With more investors taking a view on China given its distinguished market size and performance drivers, emerging market exposures outside China could offer investors a unique opportunity to take advantage of the rest of EM growth while mitigating risks associated with Chinese economy.

While the Chinese stock market tumbled in February due to the impact of COVID-19 outbreak, Chinese focused ETFs saw massive outflows. However, the trend quickly reversed with consecutive weeks of inflows into China focused U.S. listed ETFs in March, bringing year-to-date total inflows this year to over $1 billion as of March end.8

Coronavirus impact and policy support

The rising number of COVID-19 cases and disruption of the global supply chains pushed South Korean equities down in March while weaker South Korean won against the dollar intensified the foreign selling.

South Korea has been a model in its response to the COVID-19 outbreak, significantly reducing its number of daily cases from a peak of 909 in late February to as low as 64 in mid-March. Early testing and early detection of infections in South Korea proved successful to prevent the COVID19 situation from aggravating. South Korea's current testing capacity is 20,000 people a day at 633 sites, including drive-thru centers and even phone booths. While no official lockdown was ordered, the government called for expanded public participation for social distancing.9

On the policy front, the Bank of Korea acted quickly to lower the policy rate from 1.25% to 0.75%. The National Assembly has approved a KRW 11.7trn supplementary budget and additional stimulus measures are being considered to respond to the combat negative economic impacts from the COVID19.10

Import and export sensitivity

Korea’s economy is highly sensitive to change in global demand and supply as exports make up around 40% of the country’s GDP (figure 5). Semiconductors and autos are the two biggest export industries in South Korea.

Valuations, earnings, and dividends

Currently, forward 12 month earnings estimates for companies in the MSCI Korea index have been the strongest in the EM Asia region with 37.5% growth projected versus 13.4% for an EM average. Meanwhile, the country is trading at a forward P/E ratio of 8.9, a discount to the MSCI EM index at 10.1.11

Implementation and flows

Investors should consider the impact of foreign currency when investing in Korean companies, as the south Korean won has weakened 6% against the dollar in the first three months of 2020.12

In flows, Korea-focused U.S. listed ETFs saw modest inflows this year, totaling to $182 million in the first quarter of 2020.13

Figure 5: Exports % of GDP

Line graph showing exports as share of a country’s GDP.

Source: Thomson Reuters, as of April 6, 2020.

Coronavirus impact and policy support

Japan has outperformed other developed markets in the first quarter of 2020 with a 16.8% loss in the MSCI Japan index versus -23% in the broader developed market index.14

However, the country may see a technical recession after a contraction in its fourth quarter 2019 GDP growth due to a sales tax hike while COVID-19 hit growth in the first quarter. A plunge in tourism and less consumer activity are likely to result in slower growth in the first quarter Q1 and may deepen into the second quarter of 2020. News that the Olympic games are postponed and a potential Tokyo lockdown could weaken business sentiment in the second half of 2020.

The Bank of Japan’s emergency meeting on March 16 delivered reinforced monetary easing. The country’s ruling Liberal Democratic Party has submitted a 60 trillion yen proposal, with direct fiscal measures amounting to 20 trillion yen ($185 billion), to provide direct payments to low income households, to promote domestic tourism, and to support SMEs.

Import and export sensitivity

While exports make up only 20% of Japan’s economy, the country is known for its high correlation to the global capex. Given weakness in domestic activities and Japan’s greater vulnerability to a global slowdown, we have lowered our 2020 GDP growth forecast (Figure 4). With strong China recovery and U.S. policy response, Japan could see slow recovery in the second half of 2020.

Valuations, earnings, and dividends

Currently, forward 12 month earnings estimates for companies in the MSCI Japan index hold strong with 12.1% growth projected versus 6.1% for a developed market average. The index is trading at a forward P/E ratio of 10.8, relatively cheaper compared to the MSCI EAFE Index at 12.9.15

Implementation and flows

U.S. listed ETP flows reflect investors’ low conviction in Japan. Japan focused ETFs have lost -$5bn in flows YTD.16

Figure 6: Japan GDP forecast

Standardized Performance

Source: BlackRock Investment Institute with data from Bloomberg and Consensus Economics. Data as of March 31, 2020. Notes: The BlackRock Growth GPS shows where the 12 month forward consensus GDP forecast may stand in three months’ time. The FCI inputs include policy rates, bond yields, corporate bond spreads, equity market valuations and exchange rates. There is no guarantee these estimates come to pass.

Coronavirus impact and policy support

Despite its proximity to China and massive population, India has only registered less than 4000 COVID-19 cases so far17. Both central and state governments have been forceful in their response, restricting travel from afflicted areas and applying basic screening at airports. The government is also focusing on minimizing further downside risk to growth. The Reserve Bank of India (RBI) cut the repo and reverse repo rate by 0.75% and 0.9% on March 27 and introduced liquidity measures worth 3.74 trillion Indian rupee. The country’s finance minister announced an 1.7 trillion Indian rupee (roughly $22.5 billion) package targeted at the urban and rural poor on March 26.18

However, the Indian equity market has been hit the most in Asia. Further spread of COVID-19 presents a major risk to India. In countries where health care resources are limited, the fatality rate may surge to as high as 10% vs 2% of global average. India can be particularly vulnerable as only 1.3% of annual government budget was devoted to its public health system19. In addition, the 21-day lockdown imposed to curb the spread of the novel coronavirus can be particularly challenging to millions of migration workers in the country.

Import and export sensitivity

Exports make up roughly 20% of India’s GDP while imports are 17% of the country’s GDP.20

Valuations, earnings, and dividends

Since the spreading of COVID-19 cases in March, earnings of shares in the MSCI India index have been cut by 5% and the index is now trading at a forward P/E of 14, lower than its 10 year average, but more expensive compared to the forward P/E of the MSCI Emerging Market Index at 10.1.21

Implementation and flows

As the country underperformed the broader region, investors have been pulling money out of India focused U.S. listed ETPs this year. Those funds have seen $2 billion in outflows in the first three months of 2020.

Figure 7: Emerging markets manufacturing PMIs

Line graph manufacturing PMIs in major emerging market countries. A number higher than 50 indicates expansion.

Source: Thomson Reuters, as of April 6, 2020.

Indexed to MSCI
Christopher Dhanraj
Director, Head of iShares Investment Strategy
Jasmine Fan contributed to this article.
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