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Coronavirus and EM: Uncertainty and caution drive initial impact

Timely insights from portfolio managers and industry experts on key financial, economic and political issues.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.

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      By Emerging Markets Debt TeamEaton Vance Management

      Boston - In late January, news that a novel coronavirus 2019-nCoV had emerged in Wuhan, Hubei Province, China began to impact financial markets. To date, it is estimated that there have been more than 20,000 cases worldwide, with more than 99% of those in China, and the vast majority of those in Hubei.

      While the virus has been detected in at least 23 countries (as of today), only 170 cases have been detected outside of China. Currently, much about the virus is unknown including how widespread it will be and how deadly it is, according to the New York Times and numerous press reports. As of February 4, at least 427 people have died from the virus, all but two of them in China. To put those numbers into context, in an average year, approximately 27 million people get the flu, and 37,000 people die from the flu in the U.S. alone, according to the Centers for Disease Control.

      Importantly, efforts to understand how this virus may behave are not that helpful at this point. We might try to model impacts by looking at other similar viruses, such as SARS and MERS, which were also coronaviruses. But this virus appears to be spreading more rapidly than either SARS or MERS, yet we don't have enough information on how deadly it is to make a reasonable comparison. Also, those other coronaviruses emerged in countries that were comparatively small and, according to the World Health Organization (WHO), with better health care systems than China. The result is that the world is flying somewhat blind here.

      The coronavirus affects emerging markets economies through two main channels. First, and most obvious, is that an increase in uncertainty depresses asset prices. Until we have an idea of how widespread and how deadly the novel coronavirus is, we have to price more uncertainty into markets and this has the effect of moving asset prices lower.

      The second impact is that efforts to contain the virus in China through travel bans and extending the Chinese New Year holiday will reduce Chinese economic activity specifically, and global economic activity more generally. As the Chinese economy slows, countries that trade with China will be impacted.

      In Southeast Asia, this would mainly mean countries that are part of the Chinese manufacturing supply chain. Additionally, many Asian countries will be impacted as tourism from China likely declines. More broadly, commodities exporters globally will be hit as commodity prices fall due to reduced demand from China. Likely examples include exporters such as Chile, Saudi Arabia and Brazil.

      On the other hand, countries that have fewer direct economic ties to China and import commodities may do better, as falling import prices are a boost to their economies, like the Dominican Republic and Mexico.

      Bottom line: Until the world gets a better handle on the specifics of the coronavirus, uncertainty and caution will drive the impact on emerging markets and the rest of the global economy. The emerging markets debt team will be monitoring the situation closely and sharing our views with you as they take shape.