Man Group sounds alarm on emerging markets, amid rising debt and growing Covid-19 cases

Global volatility

Emerging markets assets are expected to further weaken this month, as EM economies grapple with a rise in Covid-19 cases and an uncertain recovery in China, Man Group officials said on Tuesday.

Man observed how emerging market equities, currencies and local bonds have been down in the month of May for eight of the past ten years, and predicted the trend will continue this year.

In a market commentary, Man officials highlighted rising debt-to-GDP ratios since the before the coronavirus outbreak, coupled with a sustained downturn in economic activity as the virus continues to spread.

Emerging markets hedge fund managers generated gains during April, in line with the positive numbers recorded within the broader hedge fund industry.

HFRI’s Emerging Markets Index advanced 4.55 per cent last month – but EM hedge funds remain down almost 11 per cent so far this year after the coronavirus sent markets southwards, putting the squeeze on profits.

Officials at Man, the London-headquartered, publicly-listed global hedge fund group, pointed to a “material accumulation” of EM government debt and deteriorating finances.

“We believe that in the coming months, these unsustainable debt-to-GDP ratios will worsen significantly as a consequence of the weakening economic activity.”

Underlining this point, Man’s ‘View From The Floor’ note observed how new Covid-19 cases are still “growing exponentially” in many EM countries, in contrast to certain developed market nations where numbers have stabilised or fallen.

Continued curbs on international travel will remain if current metrics in Brazil, India, Russia, Indonesia, Mexico, and South Africa – around 3 billion people - are a fair reflection of Covid-19 dynamics in EM-ex-China.

“Emerging markets have no fiscal room to manoeuver as things go from bad to worse,” the note said.

“In addition, panic reaction and a lack of coordination among policymakers means that EM countries are likely to take even longer to go back to ‘normal’ than their DM counterparts.”

HFRI’s Russia/Eastern Europe Index was up 1.96 per cent in April, but has now lost more than 20 per cent for the year. Asia ex-Japan hedge funds remain down 9.20 per cent year-to-date, despite returning 5.19 per cent last month.

Meanwhile, China-focused EM hedge funds rose 4.21 per cent last month, though they remain down 3.62 per cent year-to-date, HFRI’s data shows.

Man warned that China - which has slowly begun reopening its economy recently after reducing the Covid-19 spread - remains “unlikely to come to the rescue” for EM assets.

“China is not experiencing the V-shaped recovery some observers had initially expected. As of the end of April – when ‘normality’ has returned to China for about three weeks – coal consumption was still down 7 per cent versus 2019, property sales were down 6 per cent and transport congestion down 2 per cent.”