Executive Summary

As Covid-19 continues to dominate headlines around the world, we have been working to develop a methodology that will help us position our portfolios as we deal with the current and coming shocks to Emerging Market economies. We believe assessing the unique risk factors that the virus brings along with understanding a country’s ability to mitigate those risks is key to determining how well that country will navigate the current crisis. This paper introduces the framework we have developed to further help us make the best decisions for positioning our portfolios.


We thought long and hard before adding to the reams of Covid-19 related reading material our clients likely have littering their virtual desks. Yet, the lack of a coherent framework to address the vulnerability of the Emerging Market (EM) equities asset class during this crisis compelled us to write. It is well understood that Covid-19 will impact economic activity, but there has been far less focus on the capital market fallout of the pandemic, which will be particularly acute in emerging markets. Of course, not all EM countries will be affected similarly given these nations vary in their resilience and ability to respond and bounce back. As investors, it is critical to understand the factors that both contribute to and detract from a country’s efforts to move forward once the imminent danger of this pandemic has receded.

In our 2013 paper, “Health is Wealth,”1 we argued that resilient domestic consumption is a function of effective public spending on health care, and we have been using this premise over the years as a key input in our top-down ESG models. In this paper, we present observations from our proprietary “Covid-19 Risk Assessment” framework, which identifies where EM countries fall on the vulnerability scale. We then couple these findings with information gleaned from our “Ability to Respond” framework, which uses several factors to determine the strength of a country’s ability to combat and recover from the virus. Using this methodology, we are able to identify the “clusters” of countries that we believe will be more resilient as this crisis and its aftermath unfold.

Key Takeaways

The headline results regarding EM vulnerability/ability to respond to Covid-19 derived from this new methodology, which is described more fully in the sections that follow, are:

  • About 60% of the MSCI EM index comprises countries that rest in what we define as a “safe cluster.”
  • Countries falling in the “high risk cluster” represent 14% of the index.
  • There is significant variability among countries in their ability to respond to a crisis.
  • It is very difficult for EM countries to implement measures like “social distancing” when per capita incomes are one-sixth those of Developed Markets (DM); a “daily” wage sustains 20% of the ex-China EM working population.
  • Unlike previous crises, when index composition was poor, we now think EM countries are better-equipped to manage severe drawdowns. (Recall that drawdowns were 60% during both the 1997 Asian Financial Crisis and the 1998 Russian Financial Crisis.)