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Unfortunately, global financial markets are finally catching up to the threat posed by the Coronavirus (COVID-19) as they now act as a litmus paper that shows the risk and uncertainty of rapidly approaching global recession. Interdependence between economies – resulted from interlinked supply chains and tourism – means that the outbreak cannot be considered an issue localized to China or even Asia.

 

Yet, the case of Emerging Markets (EMs) is somewhat distinct, as the resilience and geographical divergence of these markets should not be overlooked. Indeed, as global stock markets declined last month, EM equities fell but fared better than developed market stocks. This more subtle decline was driven by a large number of investors who viewed EMs as safe haven from volatility. Generally, lower rates in the developed world as they boost the attractiveness of developing countries’ assets and help fuel the carry trade, a strategy in which investors borrow in low-yielding currencies to invest in higher-yielding ones.  

 

However, currency fluctuations, changes in foreign investment, and decreasing economic instability soon affected EMs. In these markets, bond prices fell steeply on Monday as investors began ditching assets that had previously offered some protection against the coronavirus-related sell-off. Furthermore, data from the Institute of International Finance showed that during late February, portfolio flows to EMs were down nearly 90% from earlier that month, at $3.4 billion, illustrating how investors soured on the boom-or-bust asset class as fears grew over the coronavirus outbreak. To add to the dark turn of events, investors may also face the risk that central banks of developing countries will embark on their own rate cuts as they try to shield their economies from a potential global slowdown. That could weigh on their currencies by narrowing the gap in yields between assets in EMss and those in developed markets. 

 

Unfortunately, the economic situation in which massive inflow of foreign investments halt at once as financial positions are sold quickly creates a ripple effect on developing countries’ economies. This shock leads to a decrease in the interest rate, which, in turn, reduces the country’s financial account and increases its global debt. 

 

WUHAN, CHINA  (Photo by China Photos/Getty Images)

However, there could be a silver lining for some countries as companies look to diversify their supply chain in the future. This crisis may be the tipping point towards globalization and regionalization, as global cooperation proved to be vulnerable for this kind of disruption. 

 

We previously wrote about the promise that EMs hold, and the expectations that 60% of the world’s GDP will be attributed to these markets in the next decade. The recent turn of events might prove to be an obstacle for any economic development, but it’s unlikely to completely reverse that trend. Stay tuned for more developments! 

 

For more on the Financial Times, click here

For more on Reuters, click here and here.

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Thanks for sharing !


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