BlackRock Investment Institute

Macro insights

A jolt to emerging market momentum

We believe emerging market (EM) momentum may be dented, not derailed, by the coronavirus outbreak. We expect the EM manufacturing PMI to remain above the developed market (DM) equivalent in the medium term. See the chart below.

Emerging and developed market manufacturing PMIs, 2010-2020

Sources: BlackRock Investment Institute and IHS Markit, with data from Refinitiv Datastream, Feb. 2020. Notes: The chart shows the aggregate flash IHS Markit manufacturing output purchasing managers’ index (PMI) for developed markets and the aggregate for emerging markets.

EM momentum started to pick up late last year, fueled by the détente in the China-U.S. trade war and the dovish pivot of central banks, especially the Federal Reserve. Easier financial conditions went hand in hand with an improvement in trade flows, helping to underpin our view of growth edging up in 2020 across both developed and emerging markets.

The coronavirus outbreak may delay this recovery, and risks of near-term disruptions remain. The immediate impact is likely to be felt hardest in China, as the authorities have responded with widescale restrictions on travel and production in affected areas.  But neighboring economies are at risk from shocks rippling out via reduced tourism and through global supply chains.

If the rate of coronavirus infections begins to slow, and restrictions on movement and production are lifted soon, then the effect of the outbreak is likely to be short-lived. Economies have recovered quickly from similar outbreaks in the past – especially in manufacturing as producers try to make up for lost output. Services industries may find it harder to recoup lost sales (think of hotels, restaurants and tourism).

Some central banks have already eased in response to the outbreak, led by China’s PBOC, and others have indicated that they will follow suit.  We believe that EM central banks in general have further space to ease if necessary. This is underpins our view that EM activity should pick up later in the year, helped by easing headwinds from the global trade war and the resolution of country-specific concerns from last year.