Future is looking worse for those most vulnerable

While the coronavirus pandemic has damaged developed and developing markets, economists fear it will have a disproportionate impact on emerging economies.

"The crisis hit (emerging markets) in the exact opposite way to us," said Megan Greene, global chief economist and senior fellow at the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School, Cambridge, Mass. "For the U.S. and Europe, we got the virus first and then it impacted the economy and fed through into financial markets. In emerging markets, they were first hit by the impact in financial markets — (they saw) massive capital outflows which fed through into economies and, except for China, then the virus hit."

Amlan Roy, global chief retirement strategist and senior managing director at State Street Global Advisors in London, said the concern is that 62% of world GDP growth has come from emerging markets over the past 19 years. "If 62% of that growth takes a long time to recover, world growth is going to suffer," Mr. Roy said.

Emerging markets have less capacity in their health-care systems to address the pandemic and their economies are taking huge hits — although not as large as developed markets. The International Monetary Fund projects 2020 global growth at -4.9%, with developed markets expected to contract 8% while emerging markets are expected to contract 3%. Next year, developed markets are forecast to bounce back to the tune of 4.8%, vs. a 5.9% rebound for emerging markets.

But now, more than ever, "we recognize the degree to which the emerging markets label in some ways obscures more than clarifies," said Mike Pyle, global chief investment strategist and managing director at the BlackRock Investment Institute, New York. "They are highly varying economies. … Beyond that, we think this is a moment where that heterogeneity is really pronounced and dispersion across the emerging world will be very high."

Digging deeper into the IMF's projections shows China is forecast to grow 1% this year and 8.2% in 2021, while emerging Asia in general is expected to contract by 0.8% this year and grow 7.4% next year. At the other end of the scale, Mexico is set to contract by 10.5% this year and grow 3.3% in 2021, and Latin America and the Caribbean region together is expected to contract by 9.4% in 2020 before returning to growth of 3.7% next year.

In East Asia, for example, "we see in general a set of exposures that, to us, look pretty resilient," Mr. Pyle said, citing public health successes in Taiwan, South Korea and other countries "leading to a meaningful restart of activity even if they are still some distance from normalizing."

And although China and other Asian countries' policy responses have not been "fully leaned-in as the case in the U.S. was early on, the policy capacity available in a place like China is there to handle whatever shocks come their way," Mr. Pyle said. That leads executives to believe East Asia is likely to be a "pretty resilient place."

But when it comes to Latin America, India, Turkey and other emerging market economies, "we have significantly greater" concerns around the capacity of public health systems to "really turn the tide on the outbreaks that will allow for (the limiting) of the human toll and allow a restart of economic activity," Mr. Pyle added.

Principal Global Investors LLC's Seema Shah, chief strategist in London, said executives think emerging markets will struggle to defeat COVID-19. "I doubt national lockdowns will happen again, but as long as the virus is out of control and not contained, it will weigh on consumer confidence." However, like BlackRock, the firm prefers China and is more concerned about India, Brazil and other parts of Latin America when it comes to emerging markets.

Central banks stemmed the financial crisis that was brewing back in March and the disease has not really manifested in as devastating a way in emerging markets as executives had feared, except maybe in India, said Shamik Dhar, chief economist at BNY Mellon Investment Management in London.

BNY Mellon's "overall advice is to be discriminating, look carefully at individual countries as opposed to a bloc. In our central (V-shaped recovery) scenario, we are not as worried about emerging markets as we were two or three months ago," he added.

And there may even be some bright spots in emerging markets, despite the impact of the virus.

"If you put the virus to one side, there are a lot of emerging markets that have benefited from lower oil prices (due to the oil price collapse earlier this year), lower financing costs and weakness from the dollar that's come from peak crisis," said John Roe, an economist and head of multiasset funds in London for Legal & General Investment Management. "So in that respect I can see bright spots for emerging markets, as long as they're not big oil producers. In some cases it will lead to an acceleration in the movement of jobs as developed market facilities get shut down," he said. However, there are a number of oil-producing emerging markets that were hard hit by the March collapse in oil prices, such as those in the Middle East.

However, China is seen as the one major bright spot in emerging markets.

"The virus started in China but they have been very fast by controlling the virus, so growth is recovering," said Michael Herzum, head of macro and strategy at Union Investment Institutional GmbH in Frankfurt.

Sectors that will benefit include technology and health care. "If you look around the world you have a lot of technology in China, so it could be that … China could end up as one of the winners here," Mr. Herzum added.