The speed and magnitude of the coronavirus-induced sell-off which triggered in March was of historic proportion – no market was left unscathed.
Although the long-term fallout could be severe, emerging market (EM) countries were broadly in a relatively strong position on entering the coronavirus pandemic and their respective fiscal, monetary and financial responses represent signs of progress.
Crisis lessons learnt
A number of emerging market (EM) countries have clearly illustrated their improved resilience to the challenges of an economic crisis, highlighting the progress made since events in 1998 and 2008 that rocked the region.
Higher foreign currency reserves and floating exchange rates provide buffers that enabled them to continue to service their debt and maintain access to international capital markets as the pandemic intensified.
With 57% of the JPMorgan EMBI Global Diversified Index universe rated investment grade, most EM countries have ample liquidity reserves with robust refinancing profiles and low default risk.
In our view, only a couple of names have reserves below their necessary liquidity needs for the course of 2020.
Supporting this is the International Monetary Fund's (IMF) ability to draw on its solid balance sheet to defend vulnerable economies.
China, the US Federal Reserve, the G20 and other multilateral institutions have also stepped in to help individual EM names.
While some specific countries appear to be suffering from acute distress, it is reasonable to argue that such risks have been well flagged since last year. As fixed income investors, we feel these risks are broadly reflected in bond prices.
Nevertheless, with such a diverse range of postcodes making up the EM universe, the landscape is rarely without its challenges and the Covid-19 crisis has done nothing to reduce EM investment risk.
As we wait to see how the coronavirus story will play out through the second half of 2020, there are several events looming on the horizon that could shape the potential of EM from here.
Risks litter the landscape
The threat of a second wave of the virus pushing societies back onto lockdown should not be overlooked. For the moment, investors are focusing on post-Covid-19 stabilisation, but infection rates are starting to rise again, albeit sporadically.
This brings with it the question of the shape of recovery. There seems to be a degree of complacency regarding a 'V'-shaped recovery, which is unlikely to materialise - a 'W'-shape seems more realistic.
On the international stage, as election fever mounts and the tension between US President Donald Trump and presumptive Democratic nominee Joe Biden intensifies, US-China rhetoric could easily get out of control and make markets nervous. Similarly, the threat of extreme oil price volatility remains a constant background threat for EM and developed markets alike.