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Status update: Coronavirus and EM fixed income in 2020

Market Commentary

29 April 2020

As of 27 April 2020, eighteen times more people have died from coronavirus per million of population in developed countries (DMs) than in Emerging Markets (EM). This is partly due to measurement problems, but there may also be genuine structural reasons for expecting slower spread, less overall incidence, and lower mortality rates in EM countries than in DMs. Meanwhile, the economic impact of lockdowns should prove transitory and the latest estimates from the International Monetary Fund (IMF) give some grounds for optimism about EM growth relative to growth in DMs. EM’s growth advantage becomes even stronger in the years after coronavirus. Yet, bond market valuations do not reflect this at all, which means that serious money can be made in EM bonds, particularly compared to bonds in DMs. Many EM countries are now able to meet all their financing requirements at home – and the coronavirus crisis has enabled them to showcase a raft of policy instruments typically associated only with developed economies. This still leaves a vulnerable fringe of countries, which tend to get cut off from overseas financing during bouts of risk aversion. No one should call for blanket debt moratoria in these countries many of which have worked very hard to gain a toehold in global capital markets, which they rightly see as vital to their economic futures. Instead, international financial institutions should begin to address the obvious markets failures, which clearly jeopardise the economic futures of millions at every bout of risk aversion. Meanwhile, coronavirus is likely to pave the way for recession in the US and therefore a significantly lower Dollar once the panic phase is over. On the other hand, we do not see coronavirus changing the broad direction of travel in China, which views the populism on display in the West as a way to enhance its own reputation en route to global economic and financial hegemony.


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