Irina Topa-Serry (Senior Macro Economist AXA Investment Managers) | The COVID-19 crisis is currently unfolding in emerging markets (EM). So far, they appear relatively less affected than their advanced economy neighbours such as the Eurozone or the US. But for some, it may be because they are only just entering the acceleration phase of the epidemic. For others, it may be because lockdown measures were implemented at an early enough stage, as seen in Slovakia. On a hopeful note, it may also reflect the demographic structure of some developing countries. For instance, slightly more than half of Africa’s 1.3bn population is under 19 years of age, versus just a fifth of Europe’s 740m inhabitants. At the other end of the scale, a quarter of Europeans are above 60 versus a mere 5% of Africa’s population.
UBS | The current global growth scare, which has recently focused on the US, has set off a train of events that, rather implausibly, is leading to modest outperformance by EM (v. DM) equities in down markets so far this year. We explain this very simply; worries over the US economy have pulled the dollar lower and have, for now, taken some, much – needed, currency pressure off EM equity markets.
The slowdown in oil prices affects all producer countries, both emerging and developed, whether Brazil, Mexico, Norway or the United States. The difference with the 90s is that EM are now much more solid.
Markets, especially stocks exchanges, will continue to suffer from a slowdown in global growth. IMF managing director Christine Lagarde warned on Tuesday that expansion in EM as well as in developed ones will be “weaker” than expected in July.
LONDON | UBS | How would China’s fallout affect Europe’s economic growth?
ZURICH | UBS analysts | We have painted a fairly sombre picture for emerging markets assets next year. Our base case is that EM debt will generate returns of 0-2%, while EM equities should yield 5-7% returns for USD based investors. The main thesis that underlies this view is that the growth alpha between EM and DM will fall further, with sluggishness in exports a critical concern.
LONDON | By Koon Chow at Barclays | A pertinent question asked by some investors is whether EM markets have become complacent again and whether new exogenous shocks may catch investors at a vulnerable point just as they are settling down to ‘summer’ carry trades. We see this risk in some markets but it is far from a universal theme in our view. In EM local markets – FX and bonds – we see Turkey as probably the most vulnerable to exogenous risk aversion. At the other end of the spectrum are Brazil, Central Europe, and Colombia, which do not appear vulnerable in part because of the high local real yield levels.
NEW YORK | By Markus Jaeger via Deutsche Bank Research | The US today, like Britain under the gold standard, acts as the world’s banker. It is the most important source of international liquidity, leading countries to hold USD-denominated assets. Not only does this allow the US and especially the US Treasury to tap into a large investor base ready to finance current account and fiscal deficits at a lower cost. To the extent that the demand for international liquidity and USD assets exceeds the US balance-of-payments deficit, it allows the US to recycle short-term foreign liabilities into long-term assets.