M4 BARRON’S March 16, 2020
EMERGING MARKETS
China, India Could Lead
WayinStocksRebound
I
t’s hard to think about dust settling
from the Covid-19 pandemic when
each day brings a blinding new storm.
But the case is building that China
and other emerging markets could lead the
inevitable rebound in stocks.
“We see a pretty bullish outlook for
emerging markets,” says Olga Bitel, global
equity strategist at William Blair. “The last
few weeks have increased our confidence
on the margin.”
As the U.S. and Europe scramble to
contain the mushrooming virus, the much-
derided responses of China and neighbor-
ing South Korea suddenly look Solomonic.
“What we’ve seen in China and Korea is
a textbook example of how these emergen-
cies should be handled,” says Alejo Czer-
wonko, emerging markets strategist at
UBS Global Wealth Management. “Emerg-
ing markets are in a sense ahead of the
curve.”
China is particularly impressive with its
policy response to Covid-19’s economic
damage. Beijing’s fiscal stimulus should
amount to some 2% of gross domestic
product, Czerwonko estimates, through
targeted measures ranging from cutting
employers’ social security tax to subsidiz-
ing rent for small businesses.
Western democracies, with their heavy
government debt loads and fractious poli-
tics, will strain for such scale and preci-
sion, says David Dali, portfolio strategist at
Matthews Asia. “There’s a very strong
perception that the Chinese government
has the firepower and can use it as
needed,” he says.
Emerging markets are getting an unex-
pected bonus from oil prices, which have
plunged by a third, to a four-year low,
since the top two exporters, Saudi Arabia
and Russia, failed to agree on production
curbs on March 6.
Crude will remain depressed even after
the global economy starts rebounding from
the coronavirus shock later this year, Bitel
predicts.
“Lower oil prices from the Saudi-Russia
split are likely to last longer than the epi-
demic,” she says. That’s good news across
Asia, especially India, where petroleum
imports exceeded 3% of gross domestic
product in the last fiscal year.
The current market tumult could at last
undermine a dollar whose strength
through most of the past decade has prob-
ably been the biggest drag on emerging
market stocks.
The trade-weighted greenback has
climbed by a third since 2011, dimming the
allure of ex-U.S. investments. But the halv-
ing of 10-year Treasury yields over the
past three weeks to less than 1% is tarnish-
ing their attraction as a haven.
A federal budget deficit already pushing
5% of GDP before anti-crisis measures
does not bolster confidence either.
“This could represent an inflection
point lower for the U.S. dollar,” says Howie
Schwab, an emerging markets portfolio
manager at Driehaus Capital Management.
“EM currencies are as low as they have
been relative to global export share.”
Calamity at home and the approaching
U.S. election may also make President
Donald Trump less keen to re-escalate a
trade conflict with China that held down
emerging markets most of last year, adds
Tim Murray, a multi-asset capital markets
analyst at T. Rowe Price.
“The silver lining here may be that trade
wars get pushed onto the back burner,” he
says.
The prevailing tide won’t lift all emerg-
ing markets equally, investors caution.
Latin America is dominated by Brazil,
Mexico, and other oil exporters that will
suffer from the price collapse.
Countries with precarious current ac-
count positions may get walloped by fear
in global credit markets. Schwab of Drie-
haus is underweighting Turkey and South
Africa on this premise. But China, India,
and other core Asian markets may bounce
back sooner than you think.B
By Craig Mellow
EUROPEAN TRADER
U.K. Quality-Control Firm
Fails Test for Good Value
P
roduct-testing companyIntertek
Grouphas had a good run as cus-
tomers increasingly need quality
and safety assurance in an era of
rising regulation.
The British company, a component of
the FTSE 100 index, has seen its shares
(ticker: ITRK.UK) rise 269% over the past
decade but sink recently along with most
of its peers. Shares are down 18% this
year.
Intertekearlier this month warned that
its performance will be affected by the
coronavirus, which has disrupted the sup-
ply chains of its clients in China. While it
has operations in more than 100 countries,
including Hong Kong and Taiwan, about a
fifth of group revenues comes from China.
Intertek tests, inspects, and certifies a
range of products including appliances,
furniture, medical devices, and food.
The company’s reliance on international
trade—which is under pressure from trade
wars and fallout from the virus—means
Intertek isn’t a good short-term bet, and
investors should take profits. Its business
thrives off the free movement of goods.
The more trade, the more items cross bor-
ders, requiring validation that they comply
with local consumer laws.
Last week Intertek said it’s too early to
gauge the impact of the virus on its busi-
ness. The company already has shut a gar-
ment center in Kowloon for two weeks,
after an employee became ill.
Broker RBC Capital Markets has
marked the stock Underperform, with a
target price of 4,000 pence. Shares are
currently trading at about 4,850 pence.
Morningstar Equity Research predicts the
stock will fall to 3,900 pence.
Kate Somerville, an analyst at RBC, told
Barron’sthat the stock “is trading at the top
of its peers despite delivering the lowest
organic growth over the past five years.”
The firm, which has 46,000 employees
and a market value of £8.7 billion ($11.3
billion), fetches a fat 25.3 times this year’s
expected earnings and is valued at a 20%
premium to its peers. Last week it posted
strong 2019 figures, with a significant
6.8% dividend hike and pretax profit of
£443 million for the 12 months ended Dec.
- Revenues were £2.9 billion.
Chief Executive Officer André Lacroix
toldBarron’sthat 2019 “was the fifth con-
secutive year of revenue, EPS, and cash
progression, which is a testament to our
strong operating platform.”
Shore Capital forecasts that earnings
could rise by 12% to £496 million by 2021.
Intertek traces its history back 130
years, when three quality-testing compa-
nies were formed and later merged. In
1885, Caleb Brett’s British marine-survey-
ing business offered testing and certifica-
tion of ship cargo. Three years later in
Montreal, Quebec, Milton Hersey estab-
lished a chemical-testing laboratory, and in
America Thomas Edison’s Lamp Testing
Bureau was formed in 1896.
They each came together over the next
century, under Inchcape, which bought
multiple testing and inspection companies.
Inchcape diversified, and in 1996 sold its
testing business, which was renamed In-
tertek. Intertek later listed on the London
Stock Exchange, and entered the FTSE
100 in 2009.
Intertek has offered long-term pros-
pects in an environment increasingly fo-
cused on compliance. But it’s heavily ex-
posed to China, with little means to
mitigate such geographical reliance. Its
core business is in testing, and if there are
fewer manufactured items to test, that’s a
strategic challenge that is hard to offset.
The worry is that it’s impossible to
quantify the short-term hit or its duration.
According to Shore Capital, “We clearly
can’t rule out a longer lasting economic
impact” and that “some revenue is likely to
be lost permanently.”
Investors with a taste for assurance
should look elsewhere for reassurance of
future value.B
By Rupert Steiner