Vaccine-led recovery could boost emerging markets

Putnam Fixed Income Team, 01/06/21


  • In our opinion, the pace of recovery will differ among emerging markets, depending on vaccine and virus trends.
  • North Asia is leading other countries in COVID-19 containment and economic recovery.
  • We expect that a Biden presidency will bring a more constructive foreign policy for EM countries.

Emerging-market (EM) economies will likely benefit from the availability of vaccines and a Joe Biden presidency in the United States. While the near-term outlook will be challenging for many of these countries, the medium-term outlook is positive in our view.

Stages of recovery diverge between regions

The short-term dynamics for EM differ slightly from developed countries. Some developing countries in the Southern Hemisphere — which had delayed and prolonged lockdowns during the first wave of the pandemic — are currently in a rapid phase of recovery. The weather is also turning warmer, making it easier to contain the spread of the virus.

However, other developing countries, especially those in Eastern Europe, have reimposed lockdowns. We expect negative fourth-quarter 2020 growth for these economies, with downside risks during the first quarter of 2021. Since Eastern European countries are well linked to Western European manufacturing supply chains, the recovery in manufacturing has been strong. For those reasons, growth rates may surprise to the upside.

There are countries in North Asia, especially China, that are emerging as clear winners in the race to a full recovery. These Asian economies have been successful in containing COVID-19. Recovery here, especially in services, will likely be more robust than countries with second waves of infections. These economies are the world’s manufacturing hubs, especially for electronics, and have benefited from growth in exports of manufactured goods.

Daily life will be slow to return to normal

It is unclear whether more EM countries will introduce severe mobility restrictions in the future. During the first wave, many of these governments followed their developed-market counterparts and implemented lockdowns. Economic activity collapsed, and the debt ratios surged. Global capital markets and multilateral organizations, in our view, are not as forgiving of these countries, particularly those with poor institutions and erratic politics. The second wave of lockdowns may be easier for Eastern European nations that are a part of the European Union. It is likely less so for many other EM countries.

Based on current vaccine pre-orders and virus trends, domestic life in EM is expected to normalize later than in many advanced countries.

Based on current vaccine pre-orders and virus trends, domestic life in EM is expected to normalize later than in many advanced countries. However, as economic activity recovers in developed countries, we believe EM will benefit. Demand for goods and services, and for commodities such as oil, will likely increase. Many EM countries tend to be commodity exporters. Tourism may rise after mass vaccinations. But we expect domestic services-based EM economies will recover more slowly. There will likely be a differentiation in the pace of recoveries.

Vaccine availability and pricing can improve over time. Therefore, EM recovery could start earlier than predicted. Although EM governments have limited pre-orders on mRNA-based vaccines, they have marginally more orders for the vaccine from other drugmakers. If revised Phase 3 trials prove effective, we believe EM would benefit more. If there is a successful Chinese and/or Russian vaccine, EM would gain asymmetrically more in our view.

Robust global growth is good for EM if interest-rate increases are contained. If policymakers in developed economies raise rates as growth trends higher, the returns on EM assets may be lower than expected. Higher U.S. Treasury yields can cause debt sustainability issues and depreciating EM currencies. Monetary policy may have to tighten prematurely in EM, raising default rates.

Betting on Biden

We expect that a Biden presidency will also mean a more constructive foreign policy. President-elect Joe Biden will take the oath of office on January 20, 2021. His administration is likely to take a different approach to China, but has signaled it will not return to pre-Trump policies. Biden is likely to align with traditional trade partners on issues with China. However, many of the protectionist policies should remain.

We expect that a Biden presidency will also mean a more constructive foreign policy.

Many EM countries should do better if U.S. trade policies become more predictable. In addition to China, we believe Mexico would be among the beneficiaries of the new U.S. administration.

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