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Covid鈥檚 Impact on Emerging Markets | The Corona Correction | Refinitiv - YouTube
Channel: Real Vision Finance
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Welcome to the Corona Correction Series in
association with Refinitiv, I'm your host,
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Roger Hirst.
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During the coronavirus pandemic, much of the
focus has been on the performance of developed
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markets, with Europe and the US dominating
the headlines during April and May.
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Many emerging markets however, have already
experienced two different impacts.
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The first was a collapse in demand before
the virus hit when their end markets such
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as the US went into lockdown.
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The second was obviously the virus itself,
which in many areas is still gathering momentum.
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I asked Ron Leven, Professor of Economics
at Duke University and author of Refinitiv's
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Market Voice, about the challenges that emerging
markets have faced and the uneven impact that
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the pandemic has had on these economies.
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I think it's generally recognized that as
difficult as adapting to the coronavirus environment
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has been for the developed world and US in
particular, that the challenges for the emerging
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markets are multiplied both because they are
much weaker, inherently by the definition
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being emerging markets, they have weaker infrastructure
and therefore less ability to deal with the
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the virus itself.
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Also many of these countries are much more
export dependent in their growth than in the
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developed world and therefore more vulnerable
to the general global slowdown.
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So yeah this has been been a huge challenge
for the emerging market general in general,
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in some countries in particular.
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I think it's interesting to note two two things
about this, I think really stand.
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One is that the impact is generally not only
in slower growth, but the emerging market
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currencies generally have been weakening and
are a reflection out there of the challenges
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they're facing.
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One interesting thing is though that performance
has been hardly uniform.
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There have been a couple of currencies that
have been extraordinarily weak over the course
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of this year.
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And there are other currencies, some that
stand out would be China, Taiwan, that, then
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some interesting ones, the Philippine peso,
are holding up fairly well.
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So this is, the other thing that I think is
shocking in a way about what's happening is
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that historically an environment like this,
of weak currencies and dramatic declines in
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global growth, putting political, social tensions,
raising political and social tensions in many
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emerging countries, would have been accompanied
by sharp rises in the interest rates that
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these currencies are offering and with only
a few exceptions, we're not seeing that.
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Even in this environment most emerging market
offshore interest rates are in the one percent,
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two percent range, and I think this is an
indicator of how pervasive the creep of deflation
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is spreading across the whole global economy.
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As I was saying, we've been seeing a very
big variation in currency performance, and
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I notice on currencies that are holding very
well, up at the other, and there've been a
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couple of currencies that have been very,
very weak, declining 20, 30 percent kind of
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range.
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The standouts are Brazil, the Brazilian real
has been the weakest currency has led the
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downside.
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Other currencies have been particularly weak
are the Mexican peso, the Turkish lira, the
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Colombian peso, those are all currencies that
stand out.
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In principle, this sharp declines in currencies
may be indicative of overshoot and the potential
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that if stock markets continue to hold these
gains, these rebounds that we've seen over
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the last two weeks, that there is potential
for sharp snapbacks in these currencies.
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I think that's primarily true if they are
also undervalued in real terms.
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In general for these currencies that are declining
sharply that is the case.
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So they all all those currencies I mentioned
have the potential for snapback.
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The two that I think are particularly interesting
are Turkey and Mexico, because on top of being
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undervalued, these are two currencies that
still offer relatively, and relatively is
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the important word here, carry and Turkey
in particular stands out in this perspective,
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it's it offers, it's the only currency that's
offering double digit return.
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And one thing that's very interesting is that
Turkey has problems internally beyond just
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adjusting the virus, the Turkish lira started
weakening long before the virus situation
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evolved.
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Going back to last fall reflecting political
issues going on within Turkey.
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On the Turkish lira has had a tendency to
track the CDS spread, and I think the CDS
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spread is a fairly good for most countries
indicator of broad currency, broad political
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risk.
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The CDS spread has narrowed in dramatically
over the last two weeks as the as equity markets
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have recovered, and you're seeing response
in the Turkish lira but it's it's lagging.
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So again, I think the Turkish lira in particular
offers a very nice opportunity if if things
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just stabilize, you don't even need a further
recovery in stock markets.
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But the way to look at this is that the sharp
declines in the currency, the sharp rise in
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carry, are pricing in enormous amounts of
bad news and given the general recovery in
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global asset prices and recent improvements
in global activity, it would suggest that
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the negativeness is priced into the Turkish
lira at this point is overdone.
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Many of those countries with the weakest currencies
were already under pressure pre-Covid and
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have now overshot.
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Perhaps the most remarkable feature is that
currencies have not been defended by central
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banks aggressively raising rates.
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In fact, very few countries currently have
double digit interest rates.
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Turkey offers one of the highest returns for
carry, though that also reflects a large number
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of risks that are specific to the country.
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Many of the currencies that have rebounded
should continue to extend their gains if the
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recent risk on environment can extend further
into the summer.
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We'll see you later with another update.
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