Strengths and weaknesses across emerging markets: COVID-19’s uneven impact

Across emerging markets (EM), we see a growing likelihood of an uneven impact as financial markets adjust to the possibility of a global recession this year, despite steps by policymakers to respond to the public health crisis with aggressive monetary and fiscal measures. These measures have varied widely from one EM to the next, in part owing to the divergent path that the spread of COVID-19 has taken—a situation that lends a unique uncertainty to the geographical dispersion of volatility across EM equities as an asset class. As of this writing, here’s our outlook for regions across EM in today’s fast-moving environment. 

China was the first in and first out—the first country to encounter the outbreak, which it met with drastic lockdown measures, and the first to appear to move beyond it. As of March 20, official reports of new COVID-19 infection cases were close to zero, and the latest ones appeared to be linked to citizens returning from overseas.¹ Consumption and indicators of economic activity have normalized in March after a 10% year-over-year drop in activity in February.² China’s first-quarter GDP may fall as many as 9.0 percentage points, and full-year forecasts have been revised from 5.5% to 3.0% growth—a potential outcome that would require a strong recovery in the second half of this year.³

But the recovery in China—as in the rest of the world—may be subject to the slowdown of the entire global economy, and we believe that puts what currently appears to be a V-shaped recovery in China in doubt. That said, there’s no doubt in our minds that the domestic Chinese economy is currently on the mend. 

Hong Kong, Singapore, Taiwan, and South Korea have also seen only a minor resurgence in infection in recent days.⁴ In these locations, success in handling the 2002 outbreak of Severe Acute Respiratory syndrome, or SARS, and the 2012 emergence of Middle East Respiratory Syndrome, or MERS, appears to have contributed to their current success with COVID-19 containment measures. In every case, leadership took early, decisive measures—including establishing tough border controls, shutting down public facilities, and, in South Korea, performing aggressive testing. Economic growth has been cut significantly throughout the region, with Hong Kong, Singapore, and Thailand affected the worst, given the collapse in visitor arrivals. Assuming there’s no recurrence of mass infection, early action on containment may bode well for the revival of economic growth in these areas.

The recent sharp decline in crude oil prices has been broadly favorable for a region largely made up of economies that are oil importers (with Malaysia being a notable exception). We believe the oil price downturn has effectively served as an economic stimulus that could boost growth by as much as 0.5%, while offsetting the inflationary consequences of extraordinary stimulus, especially in China and India.

Asian policymakers have focused on delivering powerful fiscal responses totaling 1% to 4% of GDP over monetary easing, which has ranged from 25 basis points (bps) to 50bps, with little more expected.⁵ In Hong Kong, cash payments to households represent 4% to 5% of GDP⁶; China made steady monetary and fiscal injections as the crisis deepened.⁷ In India, where the population of 1.3 billion people is in lockdown, an initial fiscal package amounting to 0.8% of GDP was announced on March 26.⁸

Latin America faces new challenges, as it had been emerging from a prolonged period of low growth and poor productivity prior to the pandemic.⁹ In our view, the external shock of the coronavirus stems from the significant decline in demand for goods and services produced in Latin American countries, as well as the collapse in tourism and foreign direct investment. The deterioration in terms of trade, given declines in oil and commodity prices, further contributes to a tightening of financial conditions and heightened risks for the most indebted countries of the region.

The enemy within Latin America is now the rising number of COVID-19 cases and the inadequate public health provisions, leading to closing of borders and lockdown measures that may be late by comparison with those in Asia. The combination of external and domestic pressures points to the inevitability of recession, which we expect will be of temporary—but uncertain—duration.

The policy response in the region has been principally monetary—a race to the bottom with aggressive rate cuts in Chile, Peru, and, to a lesser extent, Brazil and Mexico, where we believe weak data will eventually force rates lower.¹⁰ With limited scope, fiscal responses have been erratic, in our view, and will be constrained, notably in Brazil. 

EMs in Central and Eastern Europe, the Middle East, and Africa have exhibited different patterns in terms of virus containment and in regard to economic growth downgrades and policy responses arising from collapsing demand and declining oil prices. Restrictions and effects on growth have been harsh in Central and Eastern Europe, where service sectors are larger than in many other regions. Here, growth rates have been reduced by 4% to 5%, but monetary and fiscal resources may provide some cushion.¹¹

Among the oil producers, Russia’s output response is offsetting low prices, and economic activity outside Moscow has yet to show a marked slowdown as of this writing.¹² Saudi Arabia appears to be using its oil fund to buffer domestic demand and, so far, has seen the lowest economic growth downgrades.¹³ With oil demand destruction accelerating, this may not be sustainable, in our view. Two countries that we believe have limited scope for effective policy responses are South Africa, with a 3.5% current account deficit and a rapidly escalating public health crisis, and Turkey, which has a sizable foreign debt mismatch. However, South Africa’s central bank has cut interest rates by 100bps, and we expect that more cuts are coming.¹⁴

It’s still too early to tell, but across the EM equity asset class, we see varying and potentially volatile speeds of growth resurgence and recession for the next two quarters at least. As investors, we’re monitoring the situation carefully and seek to respond accordingly—both to weather the volatility that we see as an inevitable by-product of economic disruption and to gain exposure to those companies that we believe present resilient growth opportunities.  

1 “China reports no domestic cases of coronavirus for first time since outbreak began,” The Guardian, March 19, 2020. 2 “China purchasing indexes sink to record lows as coronavirus epidemic hits economy,” MarketWatch, February 29, 2020. 3 “‘Not unreasonable’ for China’s economy to shrink 10% in the first quarter, independent survey shows,” CNBC, March 24, 2020. 4 “Coronavirus: What could the West learn from Asia?” BBC News, March 21, 2020. 5 “Asian economies may ride out the coronavirus crisis better than the West, analysts say,” CNBC, March 25, 2020. 6 “Hong Kong offers cash handouts to ease coronavirus impact,” Financial Times, February 26, 2020. 7 “China is trying to revive its economy without risking more lives. The world is watching,” CNN, March 24, 2020. 8 “India outlines $22.6 billion economic stimulus to help poor hit by lockdown,” Reuters, March 26, 2020. 9 “BAML cuts Latam 2020 GDP forecast to 0.7% on coronavirus, oil shocks,” Reuters, March 11, 2020. 10 “Emerging Markets-Latam FX caught in virus-driven rout; Chile central bank cuts rates,” Reuters, March 16, 2020. 11 “Coronavirus Triggers Record Drops in U.S., European Business Activity,” Wall Street Journal, March 24, 2020. 12 “Russian economy facing slowdown amid oil price drop and coronavirus,” Reuters, March 23, 2020. 13 “Saudi Arabia announces $32 billion in emergency funds to mitigate oil, coronavirus impact,” CNBC, March 20, 2020. 14 “S. Africa Cuts Interest Rate to 6-Year Low to Tackle Virus Fallout,” Financial Times, March 19, 2020.