February was diabolical but March has been even worse: global coronavirus contagion, oil down 51%, gold up 5%, VIX up 63%, US$ appreciating 4%.
EM down 16%: China (down 8%) outperformed again with the partial resumption of economic activity, while Brazil (down 37%) collapsed on late coronavirus action and the effect of US$ strength (BRL depreciated 12%).
FEM down 24%: Philippines (down 22%) locked down Luzon (70% of economy), Kuwait (down 19%) and Colombia (down 39%) hit by oil price.
Other small EM: Egypt (down 26%) and Pakistan (down 31%) suffered amid pressure on foreign capital flow as policy rates were slashed (easing domestic access to credit but reducing attractiveness of carry-trade).
FM down 21%: Vietnam (down 22%) despite reported coronavirus containment, Nigeria (down 20%) as oil price drops, infections spread, FX devalued too little (5% in I&E window), and Kenya (down 16%) with FX under pressure and locusts drifting closer to core agriculture. Bangladesh (up 11%) outperformance is illusory given regulatory interference with limit-down, floor prices for stocks (the latest ad hoc, investor-unfriendly policy).
Equity market performance – March to date
Our research this month has mainly covered these macro issues:
1) Coronavirus is a universal and unquantifiable risk in small EM and should therefore be ignored (this requires the courage to change nothing).
2) Coronavirus issues specific to parts of EM, compared to DM:
- Youthful demographic should lower fatality rates but…
- Social distancing is inhibited by dense urban population;
- Any sudden-stop economic response is inhibited by informal workforce;
- Healthcare provision generally poorer;
- Room for economic policy stimulus is constrained; and
- Insecurity is a fragile basis for collective action.
3) The oil price war between Saudi and Russia can persist for a long period because each has deep financial reserves and different aims (price-setting power within OPEC for Saudi, damage to the US shale sector for Russia).
In this report there is a hyperlinked catalogue of our strategy and macro notes published this month (p2), updated charts on performance, liquidity, valuation (p3), a screen for FX rate vulnerability (p7) and country snapshots of market, macro, political and social indicators (p9).
Market valuations (P/B)