14 April 2020
Renaissance Capital holds online press briefing to discuss virus impact on emerging and frontier markets

Updates on the latest COVID-19 stats, insights into the oil market outlook

Last week, Renaissance Capital, a leading emerging and frontier markets investment bank, held an online press briefing – EM & FM COVID dashboards – plenty of moving parts & the World of Oil puzzle’ – for top international media, hosted by Renaissance Capital’s analysts Charles Robertson, Global Chief Economist, Daniel Salter, Head of Equity Strategy & Head of Eurasia Research, and Alexander Burgansky, Head of Oil & Gas Research.

Charles Robertson opened the press briefing by saying that the virus story is well understood by investors in developed markets, and there is an end in sight. A realistic assumption would be that lockdowns will be eased in late May, and governments are applying a huge amount of economic stimulus.

“For emerging markets, the story is more complicated. If we compare COVID-19 fatality rates with normal mortality, it changes the debate on lockdowns. For many emerging countries, including Egypt, Nigeria, Kenya and others, the question is whether they can afford lockdowns, because unemployment and loss of savings is too high.”

Charles maintained that many EM currencies remain extremely cheap and this may be the best opportunity to get exposure in 15 years, whether in equities or local currency bonds. “I think we are catching a mood of markets saying that the global economy will recover one day, emerging markets will come out of it eventually somewhere, and who is particularly beaten up is Latin America and South Africa, which really stand out,” he added.

Daniel Salter provided an update on the performance of emerging and frontier market funds. He noted that outflows from EM equity funds are still relatively moderate – at 1.5% of assets under management (AuM) in total over the past eight weeks. However, it is a different story with EM debt funds, where over the past six weeks redemptions have reached 10.9% of AuM, although there have been signs of a slowdown over the past week. 

Speaking of the nearly three-week-long rebound in EM equities, Daniel said this is a trend whereby developed markets are leading emerging markets, and emerging markets are leading frontier markets in terms of performance – up 23%, 17% and 3%, respectively, since the 23 March lows. Obviously, developed countries find themselves better positioned to stimulate their economies, carry out unlimited QE, guarantee everyone’s salaries and keep everything going, and that seems to be playing out in terms of market performance. 

“As for the emerging and frontier space, we are seeing some differentiation, although not universal, with countries with stronger fiscal positions and the ability to better respond to the crisis starting to outperform. Markets with low or falling bond yields are starting to outperform those with rising or high bond yields. Such outperformers include South Korea, Chile, the Philippines, India and Russia in the EM space, and Kazakhstan, Vietnam, Lithuania, Romania, Croatia and Slovenia in FM,” Daniel said.

Daniel also shared Renaissance Capital’s proprietary EM & FM coronavirus dashboards, based on screening all 48 countries in MSCI EM and MSCI FM for their vulnerability according to 10 categories – such as exposure to tourism and remittances, trade and commodities, fiscal capacity, demographics, foreign funding needs and others – all of which effectively represent potential channels of economic contagion. Daniel pointed out that tourism may be one of the last sectors to recover in a worst-case scenario, because as individual countries manage to get through COVID-19 they may be reluctant to allow their populations to go out and get infected overseas.

Speaking about the many doom-laden scenarios ahead of the OPEC+ meeting, Alexander Burgansky underlined his certainty that the oil world would ultimately come to an agreement. 

“One needs to keep in mind that oil production is different from other commodity industries due to organic production declines. Low oil prices will provide no incentive for producers to invest in new wells, and in the absence of capex we will see an average 12-13% annual decline in production globally and c. 15% in Russia, which implies an inevitable price spike on the back of capacity shortage. Hence, coming to an agreement would be the responsible thing to do to,” he said. 

Commenting later on the OPEC+ videoconference held on 12 April and the agreement reached, Alexander added: “Although there is no clarity on the overall level of production cuts, we regard the OPEC+ agreement as timely and comprehensive and will bring supply in line with the COVID-19-related demand destruction. We believe the scale of the OPEC+ reductions (and likely additional support from the broader G20 group) will be sufficient to balance the demand decline and avert the significant oversupply of oil. This action supports our 2Q20 Brent oil price forecast of $35/bl, as we believe this level is sufficient to maintain adequate spare production capacity in the short term to meet the post-lockdown demand rebound, and continue to expect that the price will revert to a long-term equilibrium of $50/bl in 2021.”

Earlier the same day, Sofya Donets, Russia & CIS Economist, Renaissance Capital, spoke at another online press briefing – ‘Russia & CIS: Fiscal reserves – do they exist and for how long can they support economies in times of crisis?’. She noted: “Looking at the ‘CIS+’ region, those countries that seem to have been hit the most by the oil price slump – Russia, Kazakhstan and Azerbaijan – could in fact be in a better position to undergo the crisis fairly smoothly. They have sufficient fiscal reserves, low levels of public debt and beneficial structural economic fundamentals to withstand the impact of the pandemic and survive at least 10 years of low oil prices. Russia’s and Kazakhstan’s fiscal positions are so robust that they are likely to avoid rating downgrades in 2020. The outlook for Azerbaijan will largely depend on the policy response.”