Emerging markets should offer value amid volatility
Even in a week of alarming headlines, the news that the Organization for Economic Cooperation and Development (OECD) said that the coronavirus outbreak could slash global growth in 2020 turned heads. It group said growth could fall to 1.5% this year—about half of its projection prior to the emergence of the virus.
In the past, it might have been assumed that emerging-markets countries would be leading the way down, but that is no longer the case. Many of these economies are in far better shape than they were during the taper tantrum in 2013 . They have lower debt levels, better hard currency reserves and a more diverse set of trading partners. They will be greatly challenged, of course, but even a broad downturn need not be unduly negative for EM fixed income.
A positive factor will be the impact of accommodative monetary policy. Many of the world's central banks have said they are at the ready, and some have already acted. This morning the Federal Reserve announced a 50 basis-point cut, and the reserve banks of Australia and Malaysia lowered their policy rates, too. Traditionally, when central banks cut rates, emerging markets sovereign credit, corporate credit and local currency bonds have outperformed. We expect this to be the case this time, as well.
Another potential boon could come from fiscal policy. On top of the monetary stimulus deployed during the trade war standoff in 2019, China likely will introduce a fiscal stimulus program to battle a sharp slowdown. Increased expenditures, tax cuts and direct transfers to citizens are certain to be on the table. A number of other countries may take similar actions, helping provide another tailwind.
While we believe risk sentiment likely is to remain fragile and particularly vulnerable to headlines and data releases, we believe investors should stay the course, adding opportunistically. If worries continue to drive yields in developing countries downward, emerging markets fixed-income assets likely will offer even more value in the near future.