Virus-hit emerging markets: Time to dump assets or buy?

Dubai: While analysts largely warn that damage from social distancing will last for longer in most virus-ravaged emerging markets, some see this as an opportune time to start investing in them.

“In those emerging markets (EMs) that were quick to control their coronavirus outbreaks, like South Africa, Poland and Vietnam, lockdowns are being eased which will allow activity to gradually recover,” noted Nikhil Sanghani, assistant economist at Capital Economics.

“But the damage from social distancing will last for longer in EMs which were slow to impose containment measures (Brazil, Russia), and where lockdowns may be less effective in controlling the virus (parts of South Asia and Africa).”

EMs set to contract

Emerging markets are set to contract by 1 per cent in 2020 before rebounding 6.6 per cent next year, according to IMF projections published in April. The MSCI Emerging Markets index was down 17 per cent for 2020 through April 30, while the J.P. Morgan Emerging Markets Bond index declined 9.82 per cent for the same period.

Asset flows reflected a difficult March and April. Emerging markets debt strategies saw $41.1 billion in net outflows this year through April 29, with about $55 billion in net outflows over March and April, show data by EPFR Global. Emerging markets sovereign debt strategies recorded $13.7 billion in net outflows for this year through April 29, with about $18.6 billion in net outflows in March and April.

Risk back on the table

While most money managers largely put risk back on the table, taking advantage of cheap assets and high-quality sovereign issues, they’re taking some comfort in pledged support by global organizations.

Cushioning increased sovereign debt risk in portfolios is the $1 trillion in lending capacity of the IMF and the World Bank, the granting of debt relief by Group of 20 nations to emerging market countries and the temporary extension of dollar swap lines to certain emerging market central banks — including Brazil and Mexico — by the Federal Reserve.

Some stay invested for long haul

Despite overall outflows since the triple shock of the coronavirus crisis, plummeting oil prices and a stock market correction, some long-term institutional investors are sticking with emerging markets, and even committing more capital at the margin.

“We know there is a large amount of crossover investors that feel an irresistible urge to dump EM assets at whatever opportunity they can - hence, overall, EM has experienced large outflows,” said Gustavo Medeiros, deputy head of research at emerging markets specialist Ashmore Group. Ashmore runs $76.8 billion in assets.

Some signs of stabilization

“More recently, proxy flows to mutual funds suggests the situation has stabilized and so we believe the technical position is much better now and the same long-term investors that remain committed to the asset class will find good opportunities to add into tremendous value over the coming quarters.”

Emerging markets sovereign debt is coming into favor among money managers, as these coronavirus-ravaged countries look to be at their most attractive valuations in more than a decade.