El-Erian, the chief economic adviser at Allianz SE and a Bloomberg Opinion contributor, said the current situation has elements of both the Great Depression and the 2008 financial crisis. While fiscal stimulus in the developed world has helped for now, investors need to eschew risk, he said. El-Erian advised selling lower-rated bonds, adjusting stock portfolios to favor companies with strong balance sheets and keeping more cash on hand for distressed opportunities down the road.
Hasenstab, Templeton’s chief investment officer for global macro, agrees. He says it’s “too early” to try to cherry pick among distressed securities. His team favors so-called haven assets, while increasing allocations to cash and several higher-yielding emerging markets with more resilient economies.
The list of developing nations seeking debt relief has already swelled in the past few months. Fifteen nations with more than $100 billion of Eurobonds outstanding had average spreads of at least 1,000 basis points over U.S. Treasuries as of March 19, according to data compiled by Bloomberg. Argentina is pursuing a restructuring, Ecuador is discussing a re-profiling and Zambia is seeking to reorganize its foreign bonds. Meantime, Lebanon defaulted in March on its first bond since independence in 1943.
Another challenge is that China, a lender of last resort for many developing nations, is experiencing its own slowdown. Reinhart, an economist at Harvard University, warns that the world’s second-largest economy may contract this year for the first time since 1976, reducing Beijing’s lending capacity. Even Chinese officials have cautioned the road back will be a long one.
The potential human misery as the coronavirus rips through developing nations even less equipped to cope with a pandemic than their advanced counterparts is what worries investors most. The stricter the rules to curb contagion, the more those countries will be forced to boost spending, in turn compelling them to borrow more. That chain of events will disproportionately hurt the weakest credits, many of them commodity producers already suffering from a collapse in exports as well as a drop off in remittances, according to Hausmann.
Nouriel Roubini, a professor at New York University who predicted hard times before the global financial crisis in 2008, says money printing will flourish, with Mexican pesos, Indonesian rupiahs and Turkish liras about to spill forth from central banks.
“How do you avoid a freefall of their currencies?” he asked.
The consequences could be even worse in countries with poor policy responses or local dynamics that make the virus harder to contain, according to Fabiana Fedeli, the global head of fundamental equities at Robeco in Rotterdam. She singled out Brazil and Mexico for their lackluster efforts to fight the spread of the disease, and India because of its crowded slums.
The International Monetary Fund and World Bank have committed some $1 trillion in lending capacity to nations hamstrung by the pandemic, yet Roubini estimates the need may be three or four times that amount.
Kamakshya Trivedi, a strategist at Goldman in London, says developing-nation bonds look more vulnerable now than during the 2008 financial crisis.