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Don’t doubt emerging markets

Lachlan Maddock
— 1 minute read

While emerging markets are likely to be hit hardest by the coronavirus, they’re still a worthy investment.

Death tolls will be higher in emerging markets, but practical experience with fighting pandemics means both damage and disruption could be short-lived. 

While some emerging markets could be hit harder than their developed counterparts, practical experience with fighting pandemics means the damage could be different. 

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“Don’t discount that some such as Nigeria have had pandemics before and have mechanisms in place,” said Damien Buchet, chief investment officer of Finisterre Capital’s Total Return Team.

“Some of the bright spots include Asia where the experience of SARS has proven instrumental in proactively dealing with the disease spread.”

The main focus of emerging markets – particularly petroleum exporters – has been on the oil price war between Saudi Arabia and Russia, but some countries will have to restructure their debt because of the external shock created by the coronavirus outbreak – and Mr Buchet says that the “reality check” of bad macro data has not yet arrived. 

“We expect low potential growth in emerging markets, depending a lot on how long containment measures will stay in place,” Mr Buchet said. 

“While most markets are highly volatile at the moment, the other key difficulty is coming from the challenging liquidity conditions.”

But while the risks are high, so are the rewards – and the key, as always, is diversification. 

“I would still feel more comfortable owning a selective portfolio of emerging market assets compared to a portfolio of US or Euro high yield assets,” Mr Buchet said. 

“By and large, from looking back at 2008, we expect defaults in this period, and they cluster around specific macro sovereign stress stories. However, with a diversified EM portfolio, you aren’t likely to get systemic default risk as many countries are handling the situation very differently.”

 

Don’t doubt emerging markets
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