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The COVID-19/Oil/US Stock Market Triple Shock: Impact on EM

Weekly investor research

16 March 2020



An unprecedented triple shock from the US stock market crash, COVID-19 and falling oil prices has dislocated asset prices and impaired liquidity across all markets. The turbulent nature of this correction and the uncertain impact on people’s daily personal and professional routines is understandably unnerving to many investors. But we believe it helps to put things into historical context. In this research piece, we discuss past financial shocks, health scares and oil price collapses, and analyse the markets’ immediate and subsequent reaction.
 
While every market shock is unique, we believe we can draw some parallels that can assist investors in navigating this latest shock, protect their portfolio, and ultimately take advantage of opportunities created by market dislocation.
 
Even though this triple shock is unparalleled, we believe the basic principles for how to manage investments in this crisis are no different from other crises. Only those in urgent need for liquidity should contemplate any action until liquidity conditions have normalised.
 
In our opinion, Emerging Markets (EM) prices have already moved into clear buying territory, but buyers too should exercise discipline by setting clear buy levels and aiming to re-enter in a staggered fashion through a ‘three-bullet’ strategy.
 
Experience from past financial shocks, health scares and oil price collapses shows that EM equities and high yield segments of EM fixed income perform particularly well in the aftermath of all three types of shocks. In our opinion, re-entry to investment grade asset classes, including local currency, can be considered, but is less time sensitive.
 
Local market investments now look particularly interesting for those with a less positive view on the US business cycle and the Dollar.

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