Covid’s Impact on Emerging Markets | The Corona Correction | Refinitiv

TL;DR

Emerging markets have faced significant challenges due to the pandemic, with weaker currencies and varying impacts on economic growth.

Transcript

Welcome to the Corona Correction Series in association with Refinitiv, I'm your host, Roger Hirst. During the coronavirus pandemic, much of the focus has been on the performance of developed markets, with Europe and the US dominating the headlines during April and May. Many emerging markets however, have already experienced two different impacts. T... Read More

Key Insights

• 😀 Emerging markets have faced challenges due to weaker infrastructure, export dependency, and the global economic slowdown caused by the pandemic.
• 🚨 Currency performance has varied greatly among emerging markets during this period.
• 😘 Interest rates in most emerging markets remain low, reflecting the prevalence of deflation.
• 💱 Currencies that have rebounded may continue to gain if the recent risk-on environment persists.
• ✋ The Turkish lira presents an opportunity for investment due to its undervaluation and relatively high carry return.
• 🚨 Many weak emerging market currencies were already under pressure before the pandemic and have now overshot.
• ☠️ Central banks have not aggressively defended currencies through interest rate hikes.

Questions & Answers

Q: Why have emerging markets faced greater challenges during the pandemic than developed markets?

Emerging markets have weaker infrastructure and are more export-dependent than developed markets, making them more vulnerable to the global slowdown caused by the pandemic. They also have less ability to deal with the virus itself.

Q: Which emerging market currencies have been the most impacted during this period?

The weakest currencies during this pandemic have been the Brazilian real, the Mexican peso, the Turkish lira, and the Colombian peso. These currencies have experienced significant declines, potentially indicating overshoot.

Q: Is there an opportunity for investment in emerging market currencies?

Yes, there may be potential for snapbacks and rebound in currencies, particularly those that are undervalued and still offer relatively high carry returns. The Turkish lira, in particular, could be an interesting opportunity if stability is achieved.

Q: Why haven't central banks aggressively raised interest rates to defend their currencies?

Despite the sharp declines in currencies, central banks have been hesitant to raise interest rates aggressively. This may be due to the overall global economic recovery and improvements in some countries' financial markets, suggesting that negative expectations have already been priced in.

Summary & Key Takeaways

• Emerging markets have been hit by both a collapse in demand before the virus and the impact of the virus itself, leading to slower growth and weaker currencies.

• Not all emerging market currencies have been affected uniformly, with some holding up well while others experience sharp declines.

• Despite the global economic slowdown, interest rates in most emerging markets remain low, indicating the spread of deflation.