Pre-pandemic, emerging market stocks were taking their cues from Sino-American trade relations and tariff talk. Then, the world changed overnight. And while global shelter-in-place mandates may have flattened the curve, they also flattened demand, disrupted global supply chains, and vaporized economic growth.

It’s been a tough year-to-date, even as the MSCI Emerging Markets Index has recovered significantly from its lows. Right now, investors are trying to assess both the risks and opportunities ahead and how any post-pandemic recovery will play out in emerging markets. Perhaps the one key takeaway for investors will be a concept that we’ve touted for years: The opportunity set within the 26 nations represented in the MSCI Emerging Markets Index is incredibly diverse, and more than ever it is dangerous to broad brush these stocks as a single confederation.

As we reflect on the political impact of the pandemic in emerging markets, we expect that certain countries will emerge from this situation, if not stronger, at least with a more coherent attitude and resolve on how to grow their economies for the remainder of 2020 and beyond. But for those countries where we have seen a chaotic response, there is heightened political and economic risk. Any recovery in those economies looks to be lower, slower, and longer than we might otherwise expect. Be forewarned. 

Another key factor that is likely to segregate winners from losers is the price of oil. Seeing Brent Crude trading in the low-$30s per barrel in late May (and as low as $20 for a moment in late April) was stunning. It’s likely that oil exporters within the emerging markets set, such as Saudi Arabia and Russia, will have very different recovery trajectories than major oil importers like India, Korea and China. Lumping these two groups together as singular “emerging markets” makes little sense. That’s not to say there will be no winning stocks within an oil exporting nation, but sifting through and analyzing the environment from the bottom up, as well as the top down, is required.

The current state of the energy markets will not only impact the future economic growth of entire nations, but it will also shape outcomes from a sector perspective. Understanding how lower input costs may benefit shipping and transportation businesses is just as important as acknowledging why petrochemicals are likely to be upended at the same time, or how plastic pricing is closely linked to petroleum. These may be simple examples, but they also demonstrate the folly of generalizations and an indexing approach for emerging markets.

Other changes following the pandemic will likely come in entertainment, how we work, and how we function in society. Physical proximity will be an increasing issue, especially in densely populated emerging markets. We all will be prone to do more at home or in isolated environments. And even when we find a vaccine, we must consider how travel habits and experiences abroad may change permanently. Technology through communication, gaming and entertainment appear to be positioned as longer-term winners. 

Yet perhaps the most intriguing and lasting consequence of this entire pandemic world may be a coming divergence within the emerging markets asset class. Investors should not expect all emerging markets to move in tandem, and the performance of individual benchmark constituents is likely to vary substantially in the years ahead. Plan accordingly.