Understand emerging markets opportunities and the American Century advantage.
By Abdelak Adjriou - March 2020
The coronavirus is impacting the global economy three different ways:
What does this mean for investments in emerging markets debt? Portfolio Manager Abdelak Adjriou discusses headwinds (and potential tailwinds) for this asset class, as well as positioning when the global outbreak subsides.
4 minutes, 5 seconds
The coronavirus is impacting the global economy three different ways. The first one is the supply chain disruption, the second one is the slowing demand, and the third one is the coronavirus is affecting the investor confidence.
For the supply chain, we have seen a lot of Chinese companies shut down, and so a lot of goods are not exported to US and Europe. The demand is also slowing down and this is mainly because cancellation in flights, in business and sport events, so that affects the tourism and the entertainment sector. And finally the investor confidence is hurt. We see it in the stock market. So the next question is how this is going to play out in the next coming weeks. For the first two points, the supply and demand, it's very difficult to assess. That will evolve with the coronavirus evolution. For the investor confidence, we believe that something can be done from the government and the central banks.
The governments, like China and Germany, have plenty of space to stimulate the economy through fiscal package. China is already doing it. Germany said last week that they are going to act. From a monetary policy response, US has more space than the other countries to act. We talk about headwinds, but clearly yes, there is some tailwinds coming from this crisis. May need lower rate in the [DM 00:01:44] space. But more broadly, I would say that emerging market are really correlated to global growth. Global growth was weak in 2018 and 2019. We expected a recovery in global growth in 2020. Unfortunately this is stopped by the coronavirus, but we think that the global recovery should restart after the coronavirus fades.
So how this is going to impact the external asset and the local asset. The external asset at the end of 2019 were relatively expensive and now, this offers now, the valuations are more attractive and it offers a better entry point because the spread have widened more than 90 by this point. There are countries like Egypt, Senegal or Kenya that grow fast and that look cheap today. Egypt, for example, is a country that grows at more than 5%, the current account deficit is narrowing. Inflation is slowing as well.
One of the major events in 2020 is the US election, and we are going to surprise you because we think that it's not a game changer for emerging market debt. There is two possibilities, either Democrat wins, and we think that the Democrats will have a less confrontational approach with the rest of the world, or Trump wins and it would be continuity. The most important factor is what's going on with the US growth, and whoever wins, we think that the US economy is going to slow down. The US economy peaked in 2018 at 2.9% and we think that now it's going to converge to its potential growth, which is below 2%. What's the impact of having a slowdown in the US economy? It means lower rates and it means that the growth, the world growth, will be much higher than the US economy, and so the emerging markets will offer a better opportunity to invest.
Inflation remains a key focus.
We unpack the latest developments to help investors navigate the global bond market.
Emerging markets currency outlook might bode well for local assets.
Previously, EM policymakers sought to protect their currencies when capital flows suddenly stopped. Now, they are trying to protect growth—at any cost.
Finding value and managing risk in emerging markets debt often means seeking opportunities beyond the constraints of a broad market benchmark.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.