[00:00:06] Welcome to the Corona Correction Series in association with Refinitiv, I'm your host, Roger Hirst. During the coronavirus pandemic, much of the focus has been on the performance of developed markets, with Europe and the US dominating the headlines during April and May. Many emerging markets however, have already experienced two different impacts. The first was a collapse in demand before the virus hit when their end markets such as the US went into lockdown. The second was obviously the virus itself, which in many areas is still gathering momentum. I asked Ron Leven, Professor of Economics at Duke University and author of Refinitiv's Market Voice, about the challenges that emerging markets have faced and the uneven impact that the pandemic has had on these economies.

[00:00:49] I think it's generally recognized that as difficult as adapting to the coronavirus environment has been for the developed world and US in particular, that the challenges for the emerging markets are multiplied both because they are much weaker, inherently by the definition being emerging markets, they have weaker infrastructure and therefore less ability to deal with the the virus itself. Also many of these countries are much more export dependent in their growth than in the developed world and therefore more vulnerable to the general global slowdown. So yeah this has been been a huge challenge for the emerging market general in general, in some countries in particular. I think it's interesting to note two two things about this, I think really stand. One is that the impact is generally not only in slower growth, but the emerging market currencies generally have been weakening and are a reflection out there of the challenges they're facing. One interesting thing is though that performance has been hardly uniform. There have been a couple of currencies that have been extraordinarily weak over the course of this year. And there are other currencies, some that stand out would be China, Taiwan, that, then some interesting  ones, the Philippine peso, are holding up fairly well. So this is, the other thing that I think is shocking in a way about what's happening is that historically an environment like this, of weak currencies and dramatic declines in global growth, putting political, social tensions, raising political and social tensions in many emerging countries, would have been accompanied by sharp rises in the interest rates that these currencies are offering and with only a few exceptions, we're not seeing that. Even in this environment most emerging market offshore interest rates are in the one percent, two percent range, and I think this is an indicator of how pervasive the creep of deflation is spreading across the whole global economy. As I was saying, we've been seeing a very big variation in currency performance, and I notice on currencies that are holding very well, up at the other, and there've been a couple of currencies that have been very, very weak, declining 20, 30 percent kind of range. The standouts are Brazil, the Brazilian real has been the weakest currency has led the downside. Other currencies have been particularly weak are the Mexican peso, the Turkish lira, the Colombian peso, those are all currencies that stand out. In principle, this sharp declines in currencies may be indicative of overshoot and the potential that if stock markets continue to hold these gains, these rebounds that we've seen over the last two weeks, that there is potential for sharp snapbacks in these currencies. I think that's primarily true if they are also undervalued in real terms. In general for these currencies that are declining sharply that is the case. So they all all those currencies I mentioned have the potential for snapback. The two that I think are particularly interesting are Turkey and Mexico, because on top of being undervalued, these are two currencies that still offer relatively, and relatively is the important word here, carry and Turkey in particular stands out in this perspective, it's it offers, it's the only currency that's offering double digit return. And one thing that's very interesting is that Turkey has problems internally beyond just adjusting the virus, the Turkish lira started weakening long before the virus situation evolved. Going back to last fall reflecting political issues going on within Turkey. On the Turkish lira has had a tendency to track the CDS spread, and I think the CDS spread is a fairly good for most countries indicator of broad currency, broad political risk. The CDS spread has narrowed in dramatically over the last two weeks as the as equity markets have recovered, and you're seeing response in the Turkish lira but it's it's lagging. So again, I think the Turkish lira in particular offers a very nice opportunity if if things just stabilize, you don't even need a further recovery in stock markets. But the way to look at this is that the sharp declines in the currency, the sharp rise in carry, are pricing in enormous amounts of bad news and given the general recovery in global asset prices and recent improvements in global activity, it would suggest that the negativeness is priced into the Turkish lira at this point is overdone.

[00:06:49] Many of those countries with the weakest currencies were already under pressure pre-Covid and have now overshot. Perhaps the most remarkable feature is that currencies have not been defended by central banks aggressively raising rates. In fact, very few countries currently have double digit interest rates. Turkey offers one of the highest returns for carry, though that also reflects a large number of risks that are specific to the country. Many of the currencies that have rebounded should continue to extend their gains if the recent risk on environment can extend further into the summer. We'll see you later with another update.