markets & economy  | may 21, 2021

COVID-19 Vaccinations and the Implications for Emerging Markets

As COVID-19 vaccination efforts ramp up in developed markets, the picture in emerging markets remains more idiosyncratic. The vaccine roll out across emerging markets is a critical question.

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Key Insights

  • Emerging markets’ vaccine orders, public health infrastructure, local vaccine production, infection rates, and regulatory regimes will be a key performance driver through 2022.

  • Emerging markets that are more exposed to developed markets via tourism or exports are likely to enjoy a faster rebound, while key risks include new COVID-19 variants and higher-than-expected inflation.

View Transcript ▾

As Covid vaccination efforts ramp up in developed markets, the picture in emerging markets remains more idiosyncratic. Identifying countries and sectors that will benefit from a faster domestic recovery or closer ties with developed markets will be a key performance driver through 2022.

This leads us to focus on markets with domestic vaccine production capacity, beneficiaries of global growth, tourist destinations, and countries in Asia that have proven able to weather the crisis.

Finding the right emerging markets can be a powerful antidote to rich valuations and low rates in developed markets.

The International Monetary Fund estimates that EM growth declined 2.4% in 2020. But much of the pain is being felt by countries other than China. China quickly and effectively contained the virus, which allowed its economy to bounce back strongly. Others, like Brazil, Russia, Mexico, and India, were slow to respond, which allowed COVID to spread more widely. The impact on their growth was much more acute.

EM governments responded appropriately, cutting interest rates and implementing fiscal stimulus. Critically, in our view, EM fiscal deterioration was due to temporary spending that should reverse in 2021.

Up to now, the toll of Covid has been largely determined by countries’ abilities to contain the spread of the virus while resuming as much economic activity as possible. Going forward, vaccine distribution is going to a play a growing role, particularly in countries where other public health measures have failed.

As we look to 2021, the pace of the vaccine rollout across emerging markets is a critical question.

We used a range of qualitative and quantitative data sources to estimate when major EMs will likely reach widespread immunity. These include vaccine orders, quality of public health infrastructure, local vaccine production, infection rates, and regulatory regimes.

As a general rule, richer countries will fare better, but we see a lot of dispersion. Smaller countries, regardless of region, should be faster, as will those with access to Sinovac and Sputnik V. Countries with domestic vaccine production, such as Brazil, Mexico, and Russia, will also have a leg up. The good news is that many of the major emerging markets should be approaching herd immunity by late 2021. Given limited resources and challenging geography, Sub-Saharan Africa is likely to lag, although having some of the youngest populations in the world will blunt the pain.

What are the investment implications and our outlook?

EMs that are more exposed to developed markets via tourism or exports are likely to enjoy a faster rebound, while those with more domestically oriented economies will be beholden to their governments’ ability to manage reopening.

At a country level, we favor markets that have strong vaccine pipelines, particularly those that have domestic production capacity like Brazil, Mexico—and smaller markets poised to benefit from a recovery in global growth and tourism, including Bahamas and Oman.

There are a few common themes. One is to look for companies that suffered during the global recession but are now well positioned to benefit as economies recover. Banks and other financial companies would be an example. Companies within select commodities, like cement or steel, are another. Another theme would be companies that were directly affected by the pandemic but that should recover as restrictions are lifted, like airports, theme parks, and hotels.

Finally, we’re finding opportunities with firms, particularly within technology, that are benefiting from some of the more durable trends coming out of the pandemic, like semiconductor companies tied to cloud technology and AI databases. Finally, as the global economy continues to recover, we also believe that investors will broaden their interest to countries in EM like India, ASEAN, and Brazil that have lagged the strong rally in North Asia.

Where could we be wrong?

But where could we be wrong? On the downside: new Covid variants might continue emerging, regulatory and production timelines may get extended, and deficit spending could persist. In addition, surging demand could push inflation rates higher than markets expect, forcing central banks to raise rates more than the nascent recoveries can withstand.

On the upside: Some regions may be closer to herd immunity than we realize with undiagnosed infections potentially as high as 20-30% of the population. The COVAX program may gain traction, providing vaccines to the poorest countries.

Risks: Emerging markets are less established than developed markets and therefore involve higher risks.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of April 2021 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy. Actual future outcomes may differ materially from estimates and forward-looking statements made.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets. All charts and tables are shown for illustrative purposes only.

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