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EMD risk factors

Which risk factors do you think will prove most material in 2020?

There are four primary risk factors we are focused on for 2020: coronavirus spreading materially beyond China; the US Federal Reserve’s stance; global liquidity; and geopolitics.

  1. The full impact of the COVID-19 virus is yet to be determined. We are relatively confident that the virus has passed its most dangerous phase, but the threat that it spreads materially beyond China remains. If the virus spreads more significantly into other Asian economies, or to the West, disrupting global trade and significantly altering economic behaviour in the global economy, then the medium to long-term hit to global growth could be meaningful.

  2. A more hawkish stance from the US Federal Reserve would challenge our view on some of our defensive high-carry positions. If this scenario were to materialise, we would look to protect positioning by taking short EM FX positions.

  3. On liquidity, we could see the environment become more challenging for EM credit given the global monetary and geopolitical backdrop. A more difficult liquidity environment might reprice hard currency spreads to incorporate a higher liquidity premium, which could impact our views on some hard currency credits.

    If this scenario were to materialise, we could express a negative view through taking a short exposure in EM credit, as well as using CDS to reduce our exposure to market beta or express a negative beta view.

  4. On geopolitics, material instability can never be ruled out, especially in the Middle East. If tensions escalate further in the region, which is still a tail risk, there could be profound implications for the Middle East, oil prices and potentially sentiment around the US economy. Russia could emerge as a potential winner from such a situation.

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