In focus

Which emerging markets are most at risk from future Covid outbreaks?


Supply chain disruptions and the latest waves of Covid-19 outbreaks appear to have hit economic activity in Asia harder than in central and eastern Europe, and Latin America.

Rapid roll-out of vaccines suggests that activity in Asia will be less vulnerable to future waves of Covid infections. However, the picture is less rosy in eastern Europe, suggesting that the region could face disruptions as the northern hemisphere heads into winter.

Diverging growth among emerging markets

Recent data indicate that, after a strong initial rebound, emerging market (EM) growth has already returned to pre-pandemic rates. The steady drip of national accounts releases in recent weeks has been consistent with seasonally-adjusted, quarter-on-quarter growth of only about 1%. Meanwhile, the forward-looking Composite EM Purchasing Managers’ Index (PMI) averaged 50.7 across July and August, down from 52.4 in the second quarter. Absent a surge in September readings when they are published next week, this suggests that growth will be even slower in the third quarter.

Digging into the data, it becomes apparent that there has been some divergence in growth dynamics across major EM regions. As the chart below shows, PMIs are generally above 50 and rising in Latin America and parts of central and eastern Europe, while those in Asia are generally retreating.

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None of this is a particular surprise. Earlier this year we argued that sluggish EM growth would be a headwind for markets and that investors should anticipate a rotation in its drivers away from Asia to other regions such as Latin America.

However, these trends have been exacerbated by some idiosyncratic issues. Relatively closed economies in Latin America will clearly be less severely impacted than export-orientated markets in Asia as bottlenecks in global supply chains stunt industrial activity.

Meanwhile, there is also some evidence that the Covid pandemic is still having an impact on the relative performance of EM. Most parts of the world are grappling with waves of infections. And there is some correlation between vaccine penetration and recent trends in PMIs. In particular, low vaccination rates have meant that outbreaks of the Delta variant have caused disruption across Asia and in South Africa. Even in China, where the vaccination rate is high, the government’s zero-tolerance policy has put a major dent in third quarter activity.

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What is the outlook on the vaccine front for EM?

There is better news on the vaccination front. Indeed, if EM are able to maintain recent vaccination rates, then most major markets that we track are on course to have delivered at least one dose to 70% of the population before the end of this year, with full vaccination likely to arrive soon after. Indeed, some EM such as China and Chile have already achieved the feat, while it will be only a matter of days until Brazil joins the club.

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Within Asia, Indonesia and the Philippines remain the laggards and are perhaps most vulnerable to disruption from further outbreaks of Covid in the months ahead. But it is South Africa and particularly parts of eastern Europe that stand out.

After making good progress in the early stages of the vaccine roll-out, take-up has stalled in many countries such that at current rates the bulk of populations will not be inoculated until the middle of next year. With winter approaching in the northern hemisphere, these economies appear to be relatively more vulnerable to disruption caused by Covid which could cause assets to underperform.

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