Macro Monthly - The case for emerging markets

Coronavirus will likely be negative for first-quarter global growth, but we do not expect it to derail the ongoing global manufacturing rebound.

04 Feb 2020


  • Amid considerable uncertainty about the risks it poses, investors are understandably concerned about the potential impact of the coronavirus on global growth
  • While the virus should negatively impact Chinese and global growth this quarter, we do not expect it to derail the healing in global manufacturing that began in Q4 and should carry on well into 2020
  • Even if the impact is bigger than we currently expect, the Chinese authorities have the full policy mix at their disposal to provide additional stimulus should it prove necessary
  • Assuming the impact of the virus is not protracted, we see global growth continuing to trend higher as last year's monetary policy easing feeds through developing and emerging market economies and as the de-escalation of US/China trade tensions boosts corporate confidence
  • As the most geared to this late cycle bounce, we remain positive on the outlook for all emerging market assets classes

At the time of writing, Lunar New Year celebrations in China have been curtailed by the spread of the deadly coronavirus. With full details about the global spread of the virus, its symptoms, incubation period and mortality rates unclear, investors are behaving entirely rationally in the face of uncertainty by selling risk assets and buying safe havens. We cannot say with confidence how or how quickly things are likely to progress. But human tragedy aside, history would suggest that such epidemics have a limited short-term impact on the wider economy that is often followed by a sharp rebound, as pent-up demand is unleashed. We suspect this particular geopolitical risk will end up an opportunity to accumulate emerging market assets at more attractive valuations.

That positive view begins with our conviction that global growth is experiencing a cyclical rebound after the sharp manufacturing slowdown of 2018-2019. Over recent months, global growth leading indicators have clearly bounced. High frequency macroeconomic data across both developed and emerging universes further supports the view that overall manufacturing demand momentum is reaccelerating. While the coronavirus is likely to impact that momentum in the short term, we do not believe it will derail it.

In our view, there is more to come from this rebound than markets are currently discounting. We see global demand growth supported by the lagged impact of aggressive monetary policy easing across developed and emerging markets in 2019. This kind of sharp move in accommodation has historically eased credit conditions, setting the stage for a V-shaped economic recovery. Central banks are set to remain accommodative in 2020 and we have already seen further easing in Turkey, South Africa and Malaysia in early 2020. In our view, there is scope for EM monetary policy in aggregate to provide further stimulus should it prove necessary.

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