Emerging market assets have had a mixed performance so far in 2020. Equities and corporate investment grade outperformed global benchmarks, while sovereign debt and real estate underperformed. We think a rally in commodity prices and a weakening US dollar have helped. The positive impact of the former may not persist, but we do not expect headwinds from a strengthening US dollar in the next 12 months. Valuations remain attractive compared to other regions, except for equities. We view Emerging Markets (EM) as a play on the recovery and we admit that the risk of another downturn is not insignificant in the near term, but we remain constructive on EM assets.
EM as a region has had a mixed year so far. Its corporates have done well as reflected by its equity and investment grade credit performance: they have outperformed global indices by 2.7% and 2% respectively (as of 13th November). However, it has performed in line with its global benchmark in the sovereign debt space and has been the worst performer in real estate underperforming its benchmark by 4% (as of 13th November).
The COVID-19 pandemic has not impacted the region uniformly. Certain countries, such as China or Vietnam controlled the virus quickly and effectively, while Brazil and India, for example, have had a tougher time. Broadly, East and Southeast Asia has suppressed the virus efficiently and has maintained low levels of infections so far, while Latin America has been less successful. Eastern European countries did well in the spring, but their infection rates have spiked rapidly in the autumn. Finally, although testing remains sporadic in Africa, we suspect their healthcare systems are better set up to handle infectious diseases than those of developed economies, for example.
So far, the economic impact has also varied based on how governments have attempted to suppress the spread of the virus. Among the largest four emerging economies, the decline in real GDP over the worst phase in the first half of 2020 varied between -23.9% year-on-year in India in Q2 and -6.8% in China in Q1. We expect the severity of the economic impact to remain connected to infection rates – even if restrictions are less stringent – and considering the overwhelming size of China within the region and its good handling of the pandemic, we expect EM to outperform developed economies in the near term.
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