On the Chinese zodiac, the start of 2020 ushered in The Year of the Rat. As the world quickly discovered, this rat carried a plague.

The coronavirus (COVID-19), first identified in December in the Chinese city of Wuhan, continues to ravage world economies and spawn humanitarian tragedies. Under-reported in the media are a series of coronavirus-spawned crises in emerging markets that could trigger financial contagion.

The dominoes in emerging markets are lining up to fall. To my mind, virus-induced pressures in emerging markets are getting insufficient attention. You ignore these overseas dangers at the peril of your portfolio.

Below, I highlight an asset class that can shelter you from the collateral damage of an emerging market meltdown. First, let’s review the scope of the problem.

Dr. Copper’s prognosis…

As is typically the case during financial market crashes, emerging markets have borne the heaviest burden since the outbreak of COVID-19.

Natural resource-rich emerging markets have gotten hit with a double whammy: the coronavirus health crisis and falling commodity prices. It’s not just crude oil that has tumbled. Economic barometers such as copper have taken it on the chin.

Copper is a widely used commodity so sensitive to economic conditions, it’s viewed as a leading indicator. Because copper is a time-proven predictor of economic trends, the red metal is said to have a PhD in Economics. Hence the metal’s nickname “Dr. Copper.” Prices of copper have plunged this year and probably have further to fall.

Even before the pandemic, many emerging markets were grappling with onerous tariffs resulting from the Sino-American trade war. The trade war is off the front pages, but many of those costly tariffs remain in place. Falling exports hurt each economy’s gross domestic product (GDP) growth and also weaken domestic demand, as production cutbacks fuel unemployment.

As a result, emerging markets have witnessed the sharpest portfolio flow reversal on record, totaling about $100 billion or 0.4% of their combined GDPs (see chart).

Because of these massive fund outflows, experts are raising the alarm about possible sovereign defaults from emerging markets.

Many of these countries already were struggling and the virus compounded their woes. The spread of the deadly coronavirus is causing a tightening of financial conditions that could exacerbate the global economic downturn, especially in vulnerable developing nations with crowded urban areas and rickety health delivery systems.

This tightening already is unmasking financial weaknesses caused by more than a decade of easy money from central banks. The COVID-19 “black swan” has shaken countries struggling under a mountain of debt. Many of these countries are dependent on commodity exports, at a time when demand for these raw materials is imploding.

Despite the partial rally in stocks, we’re not free of the risk of financial contagion. For example, asset managers confronted by massive outflows may be compelled to sell into declining markets, exacerbating downward price pressures. What’s more, leveraged investors may face margin calls that force them to unwind their portfolios. This “financial deleveraging” would further propel downward momentum.

Read This Story: The Bear Isn’t Gone…He’s Hiding

The world was facing a debt bomb, even before COVID-19 came along. As the saying goes, you can’t see who’s swimming naked until the tide goes out. As a growing number of companies get distressed and default on their loans, credit markets could seize up, particularly in risky segments such as high yield, leveraged loan, and private debt markets. These markets have ballooned since the last financial crisis in 2008-2009, reaching $9 trillion globally.

At the same time, underwriting standards, borrowers’ credit quality, and regulatory protections have diminished. Major ratings agencies have revised substantially upward their default projections for speculative-grade loans.

Asset allocation: your line of defense….

The “domino crashes” of 1929, 1987, 2000, 2008, and 2020 are all examples of situations when investing in only one type of asset was not the wisest course of action.

Several credible research studies have found that that asset allocation explains nearly 100% of the level of investor returns. At the heart of asset allocation is the risk-return trade-off. Many investors make the mistake of setting their asset allocation once and then walking away. It’s not a one-time task; it’s a life-long process of fine-tuning.

One asset class that belongs in your portfolio, especially under the conditions I’ve just described, are dividend-paying stocks.

You don’t have to be an income investor to love dividend-paying stocks. Dividend-payers are time-proven vehicles for long-term wealth building, but they’re also safe harbors in turbulent seas because companies with robust and rising dividends by definition boast the strongest fundamentals.

If a company has the low debt and healthy cash flow required to throw off juicy dividends, it follows that the balance sheet is intrinsically sound enough to sustain the firm through downturns and financial contagions.

For our latest report on the world’s best dividend stocks, click here now.

John Persinos is the editorial director of Investing Daily. Questions about crisis investing? Drop him a line: mailbag@investingdaily.com