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How do easing lockdowns impact EM?

We ask Polina how the lifting of societal restrictions have impacted economic activities in emerging markets.

So far, we’ve been pleasantly surprised by the speed of the recovery in EM.

Looking to China, it seems reasonable to assume bondholders would have been expecting a recovery by now – indeed, perhaps even a recovery back to last year’s levels in sectors such as real estate. But even there, we’re seeing some companies delivering a 25–50% year-on-year increase in sales volumes.

Another surprising example is Brazil – latest data shows cement production has now fully recovered to last year’s levels.

We believe these optimistic recoveries are primarily being driven by the steps taken by countries a few years ago to address imbalances and deal with economic challenges, such as oil price fluctuations and the ‘Lava Jato’ corruption scandal in Brazil, which are only now truly coming to fruition and normalising business activity.

It’s this historic action unrelated to the coronavirus pandemic which is largely driving overall recovery numbers, in our view.

As we move towards autumn, EMs are likely to face a fresh batch of uncertainties, including the US elections, the potential removal of subsidies and a second wave of the coronavirus. These could provide volatility for risk assets in EM.

However, we a confident that we’re unlikely to reach the levels of volatility seen in March this year, given that a lot of countries have taken the steps required to address coronavirus downsides and provide support to the corporate sector.