D.Despite their Alleged momentum, emerging economies are often struggling to escape their past. A few months ago, investors feared this year would prove to be a repeat of 2013, when rising bond yields in America led to a sharp sell-off in emerging markets known as a tantrum. Now investors are concerned that 2021 will be a grim repeat of last year as another, more virulent wave of Covid-19 infections spreads in Brazil, India and elsewhere.
To give shape to these fears, analysts have compiled lists of the most vulnerable countries, ranging from inflation to infection rates. You were looking for this year’s successors to the “Fragile Five” (Brazil, India, Indonesia, South Africa and Turkey), the countries that were hit hardest by the tantrum eight years ago. So it’s noteworthy that the man who named the original five, James Lord of Morgan Stanley, a bank, chose this moment to make some emerging market assets “downright bullish” and tell his clients to ” buy local bonds ”. What explains his calm in the face of misfortune?
After all, the misfortune cannot be denied. India’s second wave is terrifying, but not unique. The number of new infections per 1 million people in Argentina, Brazil, Chile, Colombia and Turkey (in the last two weeks of data) is still higher than in India. Another bank, JPMorgan Chase, cut its growth forecasts for India and Brazil last week after slashing the Philippines and much of Central Europe. The combined awaits now GDP the emerging markets (excluding China) are expected to grow by 5.9% this year. That is hardly faster than the expected pace of the developed world (which is expected to grow by 5.7%) and would leave emerging markets GDP only 1% bigger than 2019.
But even if the Covid-19 wave repeats itself, this is not the tantrum. The US 10-year Treasury yield has stopped rising and has fallen below 1.6% despite strong data on jobs, housing, manufacturing and retail sales in the world’s largest and most booming economy. The “real” return on inflation-linked bonds is now -0.7%, about as high as it was at the end of February. With the US bond market doing this well in the coming months, foreign investors will find it harder to resist the harsher rewards offered by rand, real, or rupiah bonds.
One reason the tantrum has decreased is because the virus didn’t. If the pandemic begins to disrupt emerging economies’ economic recovery, their central banks will certainly be less concerned about mounting inflationary pressures. Morgan Stanley believes central banks in Brazil, Russia and Mexico, among others, are unlikely to hike rates as much as markets are now expecting. The lagged recovery is bad for emerging markets, but not necessarily bad for the paperwork of their governments. Bonds usually do well when growth is slow and central banks are dizzy, notes Lord.
However, he recognizes two dangers to this view. For one thing, US bond yields are rising again earlier than he expected. Another risk is that the delayed recovery in a large emerging economy turns into something worse, which scares investors and raises concerns about the government’s creditworthiness. In this case, the price of local bonds would fall (and yields would rise) even if there was no risk of inflation. In the rich world, people flock to the ties of their governments even in the worst of times. In the emerging markets, unfortunately, so do investors who pour into the assets of the rich countries and give up their own. In this way, emerging markets remain trapped in their past. ■
This article appeared in the Finance & Economics section of the print edition under the heading “The wave against the tantrum”.