K-shaped 'recovery' hits emerging markets

Look no further than emerging markets if you need evidence that the K-shaped recovery is taking hold. Stocks and currencies from wealthier developing nations are outperforming their poorer peers amid the coronavirus outbreak, magnifying the gap between the "haves" and "have-nots" of the global economy.

The gulf may even get wider if the pandemic leads to deeper recessions in less wealthy nations due to their lower capacity for containing the virus.

A Bloomberg study of 17 emerging markets has found a 42 per cent correlation between per capita gross domestic product (GDP) and stock performance since the virus-fuelled risk sell-off began on Jan 20 until early last week. The correlation between per capita GDP and currency returns was 31 per cent.

As long as the virus is around, the K-shaped divergence will continue, said Mr Rob Subbaraman, global head of macro research at Nomura Holdings in Singapore.

"In the world with rapidly rising debt and deep recessions, the cost of servicing debt is going to get more burdensome and we cannot rule out some financial crises or major debt restructuring," he said.

Wealthier emerging markets have been better placed to rebound from the March sell-off due to more advanced technology and governance that have given them greater flexibility to respond to the pandemic.

They have been able to limit the impact of lockdowns and social distancing, make larger fiscal responses, and are also better equipped with the resources needed to curb the outbreak, such as hospitals, test centres and quarantine facilities.

Countries such as South Korea and Poland have seen the smallest increase in economic disruptions, according to an effective lockdown index compiled by Goldman Sachs.

The gauge takes into account a combination of government restrictions that suppress activity and adds social distancing numbers based on Google mobility data.

There has been a negative correlation of 54 per cent between Goldman's gauges and per capita GDP. In turn, countries with the lowest lockdown index have tended to see the best stock market and currency performance.

WIDEST DIVIDE IN ASIA

The rich-poor divide among emerging markets is widest in Asia. The stock returns from the four economies with per capita GDP above US$10,000 (S$13,700) last year - China, South Korea, Taiwan and Malaysia - have been 20 per cent above that of the nations which fall below that level, including India, Indonesia, the Philippines and Thailand.

GROWING BURDEN

In the world with rapidly rising debt and deep recessions, the cost of servicing debt is going to get more burdensome and we cannot rule out some financial crises or major debt restructuring.

MR ROB SUBBARAMAN, global head of macro research at Nomura Holdings in Singapore.

This is partly because of the number of technology firms listed in the former countries, and also due to the fact that their authorities have been able to spend more to reassure citizens and investors.

South Korea's fiscal response to the pandemic, including three supplementary budgets, totals 270 trillion won (S$312 billion), or about 14 per cent of GDP, providing support to the stock market even as the local outbreak has worsened.

In contrast, the Philippine government has said it is unable to fund the 1.3 trillion peso (S$37 billion) stimulus package approved in June. The nation's stock market is the region's worst performer this year, losing more than 25 per cent.

Looking ahead, lower rates of virus infection, greater policy space and stronger health services may help more affluent countries maintain their lead in the economic recovery.

Richer emerging economies are likely to gain access to effective coronavirus vaccines sooner, following the steps of wealthy developed nations. There is even a risk bigger economies will monopolise supply, a scenario that played out in the 2009 swine flu pandemic.

"Not many emerging markets have access to cutting-edge technology, and they will continue to struggle," said Mr Tsutomu Soma, a bond trader at Monex in Tokyo.

"We will continue to see the divergence in developed and emerging markets going forward."

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A version of this article appeared in the print edition of The Sunday Times on September 13, 2020, with the headline 'K-shaped 'recovery' hits emerging markets'. Print Edition | Subscribe