While emerging markets saw massive outflows at the start of the crisis, the outlook is beginning to change.
When lockdowns were first rolled out, Asia saw heavy outflows in emerging market debt mutual funds – particularly from wholesale investors and private banks – and market liquidity was challenged. But that’s beginning to change, according to Brett Diment, head of global emerging market debt at Aberdeen Standard Investments.
“We’ve moved through that period now and the market is a lot more balanced with investors looking to move into the asset class,” Mr Diment said. “Taking a step back and a long-term outlook, interest rates in the developed world have lowered even further.
“Strategic inflows wait in the wings as long-term investors can begin to look at increasing asset allocation. It also makes for interesting entry levels for those looking to invest in EM.”
Investors are now looking at credit risk as businesses begin to face the reality of the disruption. EM countries with higher credit ratings and more mature economies saw less disruption, while lower-rated commodity exporters and sovereigns have seen more stress, with the recent decline in oil price causing significant distress in low-rated B credits in Latin America and Africa.
“That said, EM countries are much better financed and governed than before, which better places them fiscally to weather this storm,” Mr Diment said. “Countries that have a degree of independence on monetary policy and that have floating exchange rates are in a much stronger position, such as Brazil and Mexico.
“When the initial shock of the pandemic starts to subside, these countries will be the ones that bounce back quickly.”