Long Road To Recovery
Money Magazine Australia|August 2020
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Long Road To Recovery
Developing countries have suffered a huge setback, but opportunities will emerge from the economic chaos
Darren Snyder

The International Monetary Fund (IMF) didn’t mince its words in June when it said economic activity in emerging markets has decelerated at its quickest pace in 50 years.

A direct result of the Covid-19 pandemic, the economic slowdown isn’t only occurring in emerging markets – but it’s felt at a much larger scale in these countries because they don’t always have as many financial stimulus levers to pull, and they’re typically more vulnerable to what’s happening in global markets (think plunging oil prices, for example).

Before the pandemic, emerging markets had built a solid case for investment. Some of the world’s biggest and fastest-growing companies have their base in emerging markets, including Alibaba (China) and Samsung (Korea). The 25 to 30 countries considered to be an emerging market (a country that’s transitioning to a high-income base) were contributing 74% of global growth and were expected to increase this up to 84% by 2023, according to fund manager Fidelity International. The Fidelity Global Emerging Markets Fund won Money’s 2020 Best International Emerging Markets Fund (see table on p62).

Post pandemic there’s potential for these growth numbers to return, but it’s a widely held view that this storyline will be lengthy. It’s because some emerging markets heading into 2020 with high debt and limited capacity to help their health sectors or offer financial stimulus to citizens and businesses. The IMF says emerging markets (EM) on average have responded to the coronavirus with financial stimulus totaling 2.8% of GDP, while in advanced economies this figure is 8.6%. It means the road back to “normal” for emerging markets is likely to belong.

Michael Cirami, co-director of global income at fund manager Eaton Vance, says the EM countries that manage to implement stimulus successfully are a good chance of being the winners.

“Three months into the pandemic, it became clearer which EM countries are rising to the challenge and which are not. For example, the bungled responses of Brazil and Ecuador have damaged their leadership role in the eyes of EM investors, while countries like Vietnam, South Korea and Thailand are likely to gain from their effective, transparent policies,” says Cirami.

He says investors in China will likely pause if they judge – as Eaton Vance does – that the country’s transparency in fighting Covid-19 has been less than ideal.

“The pandemic represents the first EM crisis in which many countries have tried to cut rates as stimulus – previously, such moves typically provoked investors to flee the local currency. That has been Brazil’s experience this time as well, as the real slumped as much as 30% against the US dollar,” he says.

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August 2020