- China is among one of the biggest economies to recover from the pandemic-induced downturn.
- Manufacturing is picking up, but services continue to lag among emerging-market countries.
- India and Latin America are seeing rising coronavirus cases.
Emerging-market economies — which were battered during the early part of the COVID-19 pandemic — are slowly regaining their footing. Investors have taken note and are edging back into selected emerging-market equities and bonds. However, against a backdrop of rising COVID-19 cases globally, the recovery has been uneven.
China pulls ahead in pandemic
Emerging-market economies continue to improve. The leading economic indicators — such as manufacturing PMIs and new orders to inventories — indicate that a fast recovery may be on the way. The majority of developing countries are in or much closer to the recovery zone, as shown in the chart below. China, Turkey, Brazil, and Chile appear to be the furthest along in their recovery phases.
The pace of recovery has been uneven, however, largely reflecting the same COVID-19 issues as in the advanced world. That means emerging markets don’t move in lockstep with one another. The general global story of a better recovery in manufacturing than in services is also playing out in emerging-market economies. Manufacturing is recovering, and services are lagging.
The pace of recovery has been uneven, however, largely reflecting the same COVID-19 issues as in the advanced world.
China’s recovery is leading the way. The world’s second-largest economy entered the pandemic in much better fiscal health and got an earlier handle on the virus. Only in China, where stringent health measures have been in place for a long time, have COVID-19 cases retreated by enough to allow for a more complete recovery of the service sector.
The unevenness of the recovery was highlighted in the International Monetary Fund’s latest World Economic Outlook, with China forecast to be the only major economy to expand in 2020. The recovery in China has helped boost its trading partners in parts of Asia and Latin America. Countries with longer and more serious lockdowns, such as India and the Philippines, had deeper growth shocks. Broader OECD indicators also suggest recessionary conditions continue to prevail.
Virus takes toll on India and Latin America
The virus data remain very bad in many parts of the developing world, especially in India, Latin America, and parts of the Middle East. Infections are rippling into every corner of India — a country of some 1.3 billion people — and the rural areas have been hit particularly hard. India, along with Brazil, entered the pandemic with weak economies, limiting their options for dealing with the coronavirus.
Some East European countries are showing the same upswing in infections as in the European Union. From the COVID-19 perspective, the clear outlier is Africa, where younger populations (or perhaps limited test availability) are keeping caseloads comparatively light.
A vaccine, with its positive implications for growth, matters for emerging markets. Still, the intensity of the downturn earlier this year has severely damaged the creditworthiness of some emerging-market countries. Debt sustainability will become a key theme in the post-coronavirus world.
For informational purposes only. Not an investment recommendation.
This material is provided for limited purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Putnam product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The opinions expressed in this article represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the article. Predictions, opinions, and other information contained in this article are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss.
Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.
Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
Putnam Retail Management.