Headwinds ahead but “goldilocks” global backdrop supports EM
November 10, 2020

Headwinds ahead but “goldilocks” global backdrop supports EM

Invesco Fixed Income

The global impact of COVID-19 has been unprecedented. Emerging market (EM) economies felt the shock through several channels - initially, though an historic outflow of capital and collapse of commodity prices and then through the real impact as the spread of the virus led to lockdowns, demand destruction and a drastic decline in global trade. As we draft this, infection rates are declining but remain uncomfortably high for several EMs, and concerns of a second wave, especially in Europe, are making headlines. Uncertainty over the US political transition and the trajectory of the virus remain top of mind. Nevertheless, we think the worst is over and EM economies are on the path to recovery.

First and foremost, the global cycle is entering a “goldilocks” phase. Global recovery from the COVID-19 shock will likely support external demand, including for commodities that are essential for several EMs. Inflation in advanced economies is expected to remain below targets, allowing G3 central banks to maintain their unprecedented accommodative stance for an extended period. We think this global backdrop is supportive for risk and EM assets in general, especially once US political uncertainty is in the rear-view mirror and additional fiscal support arrives, which we think will keep the US dollar subdued for longer. In addition, we expect a viable vaccine to become available sometime in 2021, which would likely boost sentiment and recharge the global recovery.

Read more about Interest rate outlook, COVID-19’s impact on the US real estate sector and Sustainability bonds

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  • The opinions referenced above are those of the authors as of 31 October 2020, unless otherwise stated. This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.

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