Emerging Market equities have been hit harder than other asset classes by the fear of a second wave of Covid-19. In the past few weeks, Emerging Market equity indices have been on a strong upward trend as investors poured back into risk-on assets as indicators of normalization began to appear. But, last week leading equity indices were down on news of a slight spike in cases. Brazil’s Ibovespa(-8%) and Argentina’s Merval(-7%) whereas in Europe the sell-off was more minute with the Turkish equity index Bist 100(-1%). An increase in cases would disproportionately affect EM assets as most countries are already struggling with debt issues and market inactivity. This morning, with the combination of lock-down lifting across Europe and fears of a second wave the markets have been muted. Investors are reacting tentatively as they prefer to stay hedged than be over-exposed with such great uncertainty.

This presents an interesting opportunity. Risk-averse investors will most likely exit from equities into something much safer like rates (bonds) because they are less volatile. So, investors willing to take the higher risk for investing into equities now are expected to see comfy double digit returns. On the downside if investors see losses a significant outflow from equities is anticipated and the rate at which economies return back to normal will be hindered – keeping your flight to Bali at sky high prices!

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