Not all EMs face the same headwind

7 May 2020

The dispersion of advancement among emerging market (EM) countries means that some are likely better equipped to confront the COVID-19 pandemic, while others may face unique near-term headwinds, according to Janus Henderson Investors. 

While some emerging markets dependent upon commodities exports would face headwinds as global growth stalled, less-developed countries may see their public health infrastructure tested as illnesses rise. 

Also, slowing global trade would be expected to continue to hurt export-driven countries but the next stage of emerging market growth would be defined by value-added industries and developing digital infrastructure, Daniel Grana and Matthew Culley from Janus Henderson’s emerging market equity team said in a note. 

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On top of that, countries like Brazil, which had been emerging from recession when it was hit by the crisis, and with demand for its commodities exports would face more headwinds. 

At the same time, the vulnerabilities of other countries were rooted in their low levels of wealth and poorly developed institutions. 

“We believe that neither Indonesia nor India – with their large migrant workforces and ill-equipped public health systems – are well prepared to handle a surge in COVID-19 cases,” Grana and Culley said.  

“Conversely, some EM countries were better positioned to absorb the shock. Asian countries that experienced the SARS outbreak in 2003 initiated a more effective response to COVID-19.  

“As a result, some investors may perceive these efforts as placing those economies on a faster track toward recovery. China, which was forced into action early and has a system of governance that allowed for draconian containment efforts, is largely viewed as nearing the end of the tunnel.” 

According to Janus Henderson, the biggest challenge for emerging economies would lie in finding the new sources to expand gross domestic products as EM’s growth was so far defined by the drive toward globalisation. 

Following this, there would be the wider adoption of digital platforms, with investments in digital infrastructure in finance, industry and other sectors should become national priorities, including digital payments becoming in growing trend not just in China but increasingly in Africa and the Middle East. 

The manager also expected a further push for diversifying supply chains as corporations were already revisiting their reliance upon individual suppliers and countries due to last year’s trade war, hearing stories of companies establishing additional channels for key production inputs and end products. 

“When applying our lenses of company, country and governance, we see other challenges. Countries with large current account deficits and foreign-denominated debt may continue to be at risk of capital flight, especially as they reach the limits of monetary and fiscal policy aimed at supporting their economies during this unprecedented demand shock,” the said. 

“On the corporate level, highly leveraged companies are likely to continue to be shunned. On governance, the nature of this crisis has led to calls for companies to commit to ’national service’ – a directive by the domestic government to act on its behalf,” the managers concluded. 







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