
Emerging markets are supported by central bank actions and valuations
Hemant Baijal. Head of Multi-Sector Portfolio Management and Jason Trujillo. Senior Portfolio Manager
Global markets have reacted to the coronavirus pandemic by building in a risk premium to reflect the deterioration in underlying growth and solvency assumptions. Emerging markets (EM), in particular, have built in a risk premium based on funding stresses that have become evident in US dollar markets.
The initial reaction to the global economic “sudden stop” was to build in a risk premium commensurate with the information available at the time. Risk aversion resulted in the strengthening of funding currencies, such as the euro and yen, relatively stable EM rates and some weakening in EM credit. As the scope of the crisis became evident, starting in Italy and then ripping through Europe and the US, funding pressures in the US dollar market emerged, first in the US Treasury market, then in European government bonds, followed by US money markets and ultimately every aspect of financial markets. Because US dollar assets are the largest component of global markets, this pressure inevitably showed up in foreign exchange markets, where it became very difficult to borrow US dollars in the forward market. The seizing up of the currency markets had a dramatic impact on EM currencies and rates.
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Investment risks
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The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Important information
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The opinions referenced above are those of the authors as of 3 April 2020. Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.