Having started 2020 on a firm footing with expectations of a pick-up in global and EM growth and a pause in the US China trade war, the outlook and performance for many asset classes, including EMD, has been upended. The shock to the global economy brought about by the spread of COVID-19, along with the extreme drop in oil prices (WTI down -66% over Q1) have led to a significant increase in volatility and a sharp sell-off in risk assets, many of which rapidly reached levels not seen since the global financial crisis. Coordinated and aggressive easing measures by almost all developed market (DM) and emerging market (EM) central banks have since alleviated liquidity pressures in most parts of the market.
The negative returns in EM Local markets were driven immediately through the repricing of their currencies as investors rushed to the safety of the US dollar. For EM Hard Currency, the strong rally in US Treasuries was quickly overshadowed by the violent widening in EM Hard Currency spreads and a complete evaporation of market liquidity. The sell-off was also accompanied by very significant outflows from EM bond and equity funds alike, putting further pressure on valuations.