What’s in store for emerging markets?

As countries around the world struggle to contain the Covid-19 pandemic, emerging markets may be better placed than advanced economies when it comes to long-term returns, CIBC analyst Éric Morin says.

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The senior analyst at CIBC Asset Management pointed to emerging markets — particularly debt instruments — as an attractive area in a late-April report on capital market returns over the next 10 years.

During an interview last month, Morin said he liked emerging economies’ long-term economic prospects better than those of advanced economies.

“EM economies are more attractive over the long run than they were in January and a year ago because of the price correction,” he said.

The MSCI Emerging Markets Index has rebounded from the March sell-off that hit global equities, but it’s still down about 16% this year.

Morin’s April report predicted the long-term expected returns for both emerging market bonds and equities would outpace returns in developed markets. While developed equity markets had “corrected back closer to fair value” due to market drops, emerging regions “began the year at relatively cheap levels, and have become cheaper,” the report said.

While Morin said the pandemic’s effects may be felt more keenly in developing countries through 2020, many have smaller debt loads than their developed peers, and the consumer’s role in economies has grown.

“The tertiary sector now accounts for about 70% of the stock exchange in emerging markets,” he said.

“This is similar to developed markets. This is important because the consumer is a more stable source of growth.”

Transitioning away from “excessive reliance” on exports and commodities means emerging economies depend less on foreign demand and investment, he said.

Plus, consumers are more responsive to policy changes, such as lower interest rates, in response to the Covid-19 crisis, he said.

An April global outlook report from the International Monetary Fund (IMF) said emerging markets are experiencing “an unprecedented mix of domestic and external shocks whose combined effects are very hard to predict. Among these, emerging markets are confronting a sharp tightening in global financial conditions.”

Yet, the IMF forecast that emerging and developing regions will contract by only 1% in 2020 (excluding China, the dip would be more than 2%) compared to a contraction of more than 6% for advanced economies.

Within emerging markets, Morin called the more diversified Asian economies “the bright spot,” as they rely more on the technology sector and have also implemented structural reforms.

Latin America is less attractive. Economies there are less diversified and more dependent on external funding, oil and other commodities, he said.

As a result, Latin America is “potentially less resilient to adverse global macroeconomic shocks,” he said.

The IMF said emerging Asian economies would be the only region with positive growth (1%) this year, though that growth would be more than 5 percentage points below its average last decade.

Conversely, Latin America would be among the hardest-hit areas, the IMF said. Both Brazil and Mexico may see significant growth declines (of 5.3% and 6.6%, respectively).

A report earlier this month from HSBC was less bullish on emerging markets.

“Relative valuations versus developed markets have narrowed and emerging economies have limited capacity to manage the current health and economic crisis,” the report said. “In this context, selectivity is key.”

HSBC also pegged Asia as the bright spot, benefiting from attractive valuations, low exposure to the energy sector, and from being a few steps ahead of other regions in relaxing Covid-19 containment measures and restarting economic activity.

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