The first three months of the pandemic have shown that the emerging markets (EMs) asset class will see clear winners and losers post COVID-19, according to Eaton Vance.
But a key measure for EM progress would be which countries could manage to pull off both monetary and fiscal stimulus successfully.
“It’s too early to handicap the winners in this regard, but not too soon to note that one of the laggards has been India, which has been hindered by inefficiencies in transmitting policy to its 28 states,” Michael A. Cirami, co-director of global income at Eaton Vance Management, noted.
“Three months into the pandemic, it has become clearer which EM countries are rising to the challenge, and which are not. For example, the bungled responses of Brazil and Ecuador have damaged their leadership role in the eyes of EM investors, while countries like Vietnam, South Korea and Thailand are likely to gain from their effective, transparent policies,” Cirami said.
Following this, new issues by Romania, Abu Dhabi and North Macedonia were a clear signal that EM investors became open to a wider range of sovereign issuers and had broadened out beyond investment grade to include better quality high-yield EM debt.
At the same time, investors in China might want to give a pause going forward as the country’s transparency in fighting COVID-19 was “less than ideal”, he said.
On top of that, a geopolitical fissure had begun to emerge in reaction to China’s new law that superseded the Hong Kong constitution and threatened the end of “one country, two systems”.
However, this pandemic was the first EM crisis in which many countries tried to cut rates as stimulus – previously, such moves typically provoked investors to flee the local currency. This was the case in Brazil which saw the real slumped as much as 30% against the US dollar.
“While COVID-19 continues to be front and centre as a macroeconomic, societal and market force, some of the same issues that were prevalent pre-pandemic began to reassert themselves. UK Prime Minister Boris Johnson spoke about accomplishing Brexit in 2020. President Trump and Secretary of State Mike Pompeo talked about the virus’s origination in Wuhan and whether China covered it up,” Cirami said.
“During this historic recovery, the fundamental research capability required to identify potential winners and losers has never been more crucial.”
