Emerging-Market bonds have edge over stocks on Covid-19 risks

Students returning from China being checked by medical assistants during a health screening at Kolej Tun Ahmad Zaidi 10th College) in University Malaya. Emerging-market local-currency bonds especially in Asean countries should continue to prove more resilient than their equity counterparts amid the Covid-19 outbreak thanks to proactive monetary policy and uncertainty over corporate earnings, according to market participants.

The Bloomberg Barclays EM Local-Currency Government Bond Index has fallen just 0.2% since markets first took fright about the outbreak on Jan. 21, compared with about a 3% drop in the MSCI Emerging Markets Index. While developing-nation exchange-traded-funds have seen outflows, they have been concentrated in stocks, with bond funds seeing much milder withdrawals.

In some emerging markets, investors are flooding into debt as investors look to central banks. Foreign investors have been net buyers of South Korean debt for 21 straight days through Feb. 10, according to data from the Financial Supervisory Service, as bets rise for a rate cut. Still, not every developing country is benefiting -- global funds are selling Indonesian sovereign bonds at the fastest pace in almost a decade.

While equities have historically enjoyed quick recoveries after previous sell-offs, thanks to buy-the-dip investors, there remains a lack of visibility over the virus’ impact on profits.

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