Mathieu Saint-Cyr, Managing Director, Head of Asset Management and Alain Chevee, Director, Geneva Management Group discuss how emerging market assets landscape will look post Coronavirus.
At the beginning of 2020, asset managers looked set to take a bullish view on emerging markets. That optimism seemed well-placed too.
After all, emerging markets equities ended the year on a strong note, up 18.4% in US dollar terms. Predictions were that the US Dollar was set to wane and, with central banks increasingly reluctant to cut interest rates, growth in developed markets would slow down, making emerging markets more attractive.
But with the outbreak of the Coronavirus causing major disruptions to economic activity in China and other Asian markets, it’s worth looking at whether there’s still reason for investors to remain positive when it comes to emerging markets.
Short term pain
There is no doubt that the Coronavirus outbreak will provide some emerging markets pain in the short term. The fact that large portions of the world’s second biggest economy have effectively shut down all but guarantee that.
The impact will, however, likely only be felt in the short-term. Despite the current severity of the outbreak, the likelihood is that it will be contained within a couple of months and that affected industries will return to normal. This will, in turn, free up the flow of capital and allow for a return to the scenario envisioned at the beginning of the year. Similarly, emerging market commodities should see a bounce-back once the situation stabilises.
Even with that in mind, however, emerging market assets may still be the best available option right now.
Fears that the virus will dampen global growth have driven Treasury yields lower, while years of “easy money” policies from central banks have made the hunt for high returns more challenging than ever.
As a result, emerging market debt is still outperforming other asset classes. Small wonder then that, as of early February, flows into emerging market debt funds were about US$10-billion so far this year.
Once the crisis around the Coronavirus settles, some emerging market assets may see even bigger positives than they were set to at the beginning of the year.
If central banks respond to the virus with stimulus packages, there could be a “supercharged” rally for local currencies. Thailand, Singapore, and The Philippines have already either cut rates or expressed a willingness to do so.
Beyond the crisis
Outside of the uncertainty caused by the Coronavirus outbreak, the outlook for emerging markets remains strong.
While JP Morgan predicts that Chinese growth will continue to decelerate, it believes that other markets will make up for it. As a result, emerging market growth will accelerate from 4.1% in 2019 to 4.3% in 2020.
Emerging market hard currencies, meanwhile, are poised to deliver roughly 8% returns, with the number closer to 11% for emerging market local currency.
With no signs of the developed world’s low-growth scenario improving at any point in the near future, that means the emerging market growth premium will continue to widen through the rest of 2020.
Vital to this premium is the fact that emerging markets are now more resilient than they once were, thanks to increasingly sophisticated exports and higher levels of intra-emerging market trade.
The global growth caveat
There is, of course, one caveat to the positive outlook for emerging markets. If there is a significant enough deterioration in global growth due to company earnings decreases, investors could retreat to the relative safety of the dollar. Another possibility could be the increase of company defaults due to working-capital shortfall (it is worth remembering that working-capital is often between one and two months for most companies and hence they have a relatively short period before they get into trouble).
With the November elections in sight and the desire for rapid recovery post-Coronavirus, both the US and China will be under pressure to play nice, further improving the outlook for emerging market economies.
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