Emerging markets ultimately fared better than many feared through the Covid-19 pandemic. The initial concerns were that, combined, the hit to trade and tourism, weaker commodity prices and slowing foreign direct investment (FDI) could prove disproportionately damaging for developing economies.
However, overall, emerging market (EM) responses to the pandemic proved effective. Lockdowns were consistent in most countries. Fiscal measures such as tax deferrals, public sector loans or capital injections into businesses were supportive. A weakening USD and monetary policy manoeuvres – from policy rate reductions, special liquidity facilities and relaxed reserve requirements – limited the immediate fallout. As we head into 2021, global demand is recovering swiftly, and we expect emerging economies to rebound. Macroeconomic forecasts suggest positive GDP growth in 2021 in EMs compared to 2020.
Even so, the pandemic will have a lasting effect, having increased the global poverty rate and caused considerable damage to developing labour markets. Despite encouraging developments in vaccines, distribution of them in emerging markets – where access to refrigeration is less dependable – remains an unresolved issue.
The way asset management chooses to respond, as the world returns to normal, will be crucial to how lengthy the after-effects of Covid-19 are to EMs. We think there are a slew of opportunities from which investors can benefit while supporting small investees in developing economies.
Many institutions we work with have endured the crisis much better than we anticipated at the beginning of the pandemic. We expect well managed microfinance institutions (MFIs) should be able to maintain required liquidity and capitalisation levels. In some markets, such as India, better performing MFIs may be able to increase market share as demand picks up. In addition, a weaker US dollar may ease debt burdens for countries who borrowed in dollars.
We also believe impact bonds continue to look attractive (better value) relative to investment grade credit in developed markets. As ever, finding that value depends on being selective, but as the market in social, impact and green bonds continues to grow, the range of potential outcomes is widening.
Given the limited opportunities for growth and delayed collections, many microfinance institutions will enter 2021 with lower cash reserves than desired. They will, in some cases, require capital injections to achieve targets and this creates an especially supportive environment for private equity investments. There are risks associated with the short/medium-term impact of Covid-19 on business models, but attractive pricing is on offer, where we think risks are manageable and understood.
Finally, the Covid-19 pandemic has not diminished the importance of longer-term themes; chief amongst them the ongoing fight against climate change. The world’s population continues to grow and each of us are consuming more. Beyond the coming year and (hopefully) a revitalised global economy, investment in infrastructure development is one of the main drivers of sustainable growth in the emerging markets.
The energy sector, in particular renewable energy, remains in focus for investors. Emerging market populations already make up 65% of the global total, and are growing rapidly. This creates considerable demand for the development of infrastructure which must be met sustainably, for all of our sakes.
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