The recession caused by the outbreak of the coronavirus (COVID-19) will have three medium-term effects, each good for emerging markets (EM), according to a Renaissance Capital research note.
The note added that they might, however, add political risk to energy exporters and those facing elections in 2020.
It forecast that a Democrat victory in the upcoming US elections in November 2020 should improve FDI flows to EM and reduce dollar overvaluation. It cited that, in the last century, the three US presidents who fought a second-term election after a recession late in their first term have all lost: Hoover, Carter and Bush Snr.
Accordingly, Renaissance Capital expects a more stable Democrat presidency would improve the global investment climate. This will encourage firms to seek the best returns globally, without fear of sudden tariff wars, thus in favour of EM.
“We see the strong dollar, already roughly 10% overvalued relative to its long term. For EM
investor returns, a weaker dollar tends to be helpful. More FDI into EM by US companies is a positive, both in terms of greater capital efficiency of US companies themselves and in terms of lifting investment in EM,” the note said.
The research firm forecast that developed markets (DM) will offer minimal yield on bonds, low yields on high-yield (HY) bonds due to central bank buying, and expensive equities priced for low dividend yields.
The note said that higher debt in DM should keep interest rate lows, reducing borrowing costs for EM and Frontier Markets. However, the firm forecast greater political uncertainty in oil exporters if low oil prices sustained.
“We do not see evidence yet that political leaders in DM or EM will see their popularity suffer in the medium term from their coronavirus policies. But the economic impact will have political repercussions,” the note said.
The report forecast that the economic hit could be more damaging in the US. It also indicates that when oil exporters have to change the promise made to citizens from “we don’t tax you and you don’t get the vote” to “we will tax you”, it is not surprising that pressure grows for a say in how those taxes are spent.